The AQR Insight Award, sponsored by AQR Capital Management, recognizes important, unpublished papers that provide the most significant, new practical insights for tax-exempt institutional or taxable investor portfolios. Up to three papers share a $100,000 prize.

2013 AQR Insight Award Winners 

 

First Prize

Conditional Risk Premia in Currency Markets and Other Asset Classes

The paper considers securities' downside risk, that is, the risk of losses during crises, and finds that currencies and other securities command a higher average return if they face higher downside risk.


Martin Lettau, Ph.D.
University of California at Berkeley

Matteo Maggiori, Ph.D.
New York University

Michael Weber
University of California at Berkeley
Research Overview

 

Martin Lettau, Ph.D.
Kruttschnitt Family Chair in Financial Institutions
Haas School of Business, University of California at Berkeley
Martin Lettau has joined the finance group in September 2008 as full professor. He was a visiting professor of economics at Columbia University and Assistant Finance professor at Stern. He also served as senior economist in capital markets for the Federal Reserve Bank of New York. He received his MA and Ph.D. in economics from Princeton University. Professor Lettau is a Research Associate of the NBER and a Research Fellow of the CEPR. He has won the Smith-Breeden Award, the Frank Ramsey Prize and the Steven F. Maier Prize for Excellence in Research. His research has been published in the American Economic Review, Journal of Political, Journal of Finance, Review of Financial Studies, Journal of Financial Economics and other academic journals. He served on the editorial board of the Review of Financial Studies. Professor Lettau's research has included the interaction of the macroeconomy and asset markets, stock-return predictability, the effect of macroeconomic volatility on the stock market, and stock market volatility.

Matteo Maggiori, Ph.D.
Assistant Professor of Finance
Stern School of Business, New York University
Matteo Maggiori joined New York University Stern School of Business in July 2012 as an Assistant Professor of Finance, with a joint appointment as an Assistant Professor in New York University’s Department of Economics. He is on leave for the 2012-13 academic year while serving as a Fellow in the International Economics Section of the Department of Economics at Princeton University. Professor Maggiori’s research expertise is in international macroeconomics and finance. His doctoral research focused on the role of the U.S. and the U.S. Dollar in the international financial system. He was recognized by the Review of Economic Studies as one of the most promising graduating doctoral students and invited to present his research at the 2012 Review of Economic Studies May Meetings. Prof. Maggiori received a B.Sc. in Economics from Luiss Guido Carli University in Italy and an M.Sc. in Economics and Finance from Warwick University in the U.K. He received a Ph.D. in Finance from the University of California, Berkeley.

Michael Weber
Ph.D. Student, Finance
Haas School of Business, University of California at Berkeley
Michael Weber is a PhD candidate at the University of California at Berkeley, Haas School of Business and a visiting researcher at the Bureau of Labor Statistics. His research interests include Asset Pricing, Macroeconomics and Monetary Policy. He holds a Diploma in Business Economics from the University of Mannheim in Germany and a Master of Science in Finance from the Haas School of Business.



The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential between high and low interest rate currencies is higher conditional on bad market returns, when the market price of risk is also high, than it is conditional on good market returns. Correctly accounting for this variation is crucial for the empirical performance of the model. The DR-CAPM can jointly explain the cross section of equity, commodity, sovereign bond and currency returns, thus offering a unified risk view of these asset classes. In contrast, popular models that have been developed for a specific asset class fail to jointly price other asset classes.
Distinguished Paper

Misrepresentation of Asset Quality and Financial Intermediation: Evidence from RMBS Market

A new approach to quantify asset misrepresentation by sellers in the mortgage markets, specifically the securities in the non-agency RMBS market.


Tomasz Piskorski, Ph.D.
Columbia University

Amit Seru, Ph.D.
University of Chicago

James Witkin
Columbia University
Research Overview

 

Tomasz Piskorski, Ph.D.
Edward S. Gordon Associate Professor of Real Estate and Finance
Graduate School of Business, Columbia University
Tomasz Piskorski is an Edward S. Gordon Associate Professor of Real Estate and Finance at Columbia Business School. Professor Piskorski received an M.S. in Mathematics from New York University Courant Institute of Mathematical Sciences and Ph.D. in Business Administration (Economics) from New York University Stern School of Business. His research interests include real estate finance, asset securitization, security design and contracting, and market structure and regulation. His work has been published, among others, in the Journal of Financial Economics, Review of Financial Studies, Journal of Monetary Economics, and Journal of Economic Theory. His research and market views are regularly featured in media with recent coverage including Wall Street Journal, Business Week, Time, Economist, Bloomberg, Reuters, CNBC, and Chicago Tribune. He teaches MBA Real Estate Finance class at Columbia Business School.

Amit Seru, Ph.D.
Associate Professor of Finance
Booth School of Business, University of Chicago
Amit Seru joined Chicago Booth in 2007 after earning his Ph.D. in finance at University of Michigan's Ross School of Business. He is interested in issues related to financial intermediation and regulation and interaction of internal organization of firms with financing and investment. His papers in these areas have been published in the Quarterly Journal of Economics, the Journal of Finance, the Journal of Financial Economics, the Journal of Monetary Economics and the Review of Financial Studies. His research has been featured in major media, including the Wall Street Journal, the New York Times, the Financial Times and the Economist. Prior to his PhD, he earned a bachelor's degree in electronics and communication and an MBA in finance from the University of Delhi. He was the recipient of a Rackham Pre-Doctoral Fellowship at University of Michigan and received a Lt. Governor's gold medal for overall academic excellence at University of Delhi.

James Witkin
Research Manager
Graduate School of Business, Columbia University
James Witkin is Research Manager at the Paul Milstein Center for Real Estate at Columbia Business School, where he has been since graduating from Brown University in 2010 with a B.A. in Economics. While at Columbia Business School, James's primary research focus has been on housing policy, particularly examining the government's role in the mortgage market.



We contend that buyers received false information about the true quality of assets in contractual disclosure by intermediaries during the sale of mortgages in the $2 trillion non-agency market. We construct two measures of misrepresentation of asset quality -- misreported occupancy status of borrower and misreported second liens -- by comparing the characteristics of mortgages disclosed to the investors at the time of sale with the actual characteristics of these loans at that time. About one out of every ten loans has one of these misrepresentations. These misrepresentations are not likely to be an artifact of matching error between datasets that contain actual characteristics and those that are reported to investors. At least part of this misrepresentation occurs within the boundaries of the financial industry (i.e., not by borrowers). The propensity of intermediaries to sell misrepresented loans increased as the housing market boomed, peaking in 2006. These misrepresentations are costly for investors, as ex post delinquencies of such loans are more than 60% higher when compared with otherwise similar loans. Lenders seem to be partly aware of this risk, charging a higher interest rate on misrepresented loans relative to otherwise similar loans. There is little evidence that these misrepresentations were priced in the securities at their issuance. A significant degree of misrepresentation exists across all reputable intermediaries involved in sale of mortgages. The propensity to misrepresent is unrelated to measures of incentives for top management or to quality of risk management inside these firms. Misrepresentations on just two relatively easy-toquantify dimensions of asset quality could result in forced repurchases of mortgages by intermediaries in upwards of $160 billion.
Honorable Mentions

Disagreement and Asset Prices

There is a premium to be earned from “disagreement risk” when market participants disagree on an asset’s value.


Bruce Carlin, Ph.D.
University of California at Los Angeles

Francis Longstaff, Ph.D., CPA, CFA
University of California at Los Angeles

Kyle Matoba
University of California at Los Angeles
Research Overview

 

Bruce Carlin, Ph.D.
Associate Professor of Finance
Anderson School of Management, University of California at Los Angeles
Bruce Carlin is an Associate Professor of Finance with tenure at UCLA Anderson School of Management. Professor Carlin teaches Corporate Finance at UCLA and was awarded the 2008 Dean W. Robbins Award for teaching excellence. He has been recognized previously for his teaching acumen at both Duke University and the University of North Carolina. Professor Carlin's primary research interests are in the areas of asset pricing, theoretical corporate finance and consumer finance. He received the 2009 Swiss Finance Award, which is given annually to the top paper in finance. He was also the 2009 recipient of UCLA's Eric and "E" Juline Faculty Excellence in Research Award. Professor Carlin is an Associate Editor at the Review of Financial Studies.

Francis Longstaff, Ph.D., CPA, CFA
Allstate Professor of Insurance and Finance
Anderson School of Management, University of California at Los Angeles
Francis A. Longstaff is the Allstate Professor of Insurance and Finance at UCLA Anderson School of Management. Professor Longstaff is a Certified Public Accountant (CPA) and a Chartered Financial Analyst (CFA). From 1995 to 1998, he was head of Fixed Income Derivative Research at Salomon Brothers Inc. in New York. He has also worked in the research department of the Chicago Board of Trade and for Deloitte and Touche as a management consultant. Professor Longstaff's primary research interests are in the areas of fixed income markets and term structure theory, derivative markets and valuation theory, credit risk, computational finance, liquidity and its effects on prices and markets, and the role of arbitrage in financial markets. He has published nearly 40 articles in academic and practitioner journals, and many of his valuation models have been used widely on Wall Street and throughout the global financial markets.

Kyle Matoba
Ph.D. Student, Finance
Anderson School of Management, University of California at Los Angeles
Kyle Matoba is a third-year Ph.D. student at UCLA Anderson School of Management. He received a B.S. in Statistics and a B.A. in Economics from UC Davis in 2008. He received an M.S. in Statistics from Stanford University in 2010.



How do differences of opinion affect asset prices? Do investors earn a risk premium when disagreement arises in the market? Despite their fundamental importance, these questions are among the most controversial issues in finance. In this paper, we use a novel data set that allows us to directly measure the level of disagreement among Wall Street mortgage dealers about prepayment speeds. We examine how disagreement evolves over time and study its effects on expected returns, return volatility, and trading volume in the mortgage-backed security market. We find that increased disagreement is associated with higher expected returns, higher return volatility, and larger trading volume. These results imply that there is a positive risk premium for disagreement in asset prices. We are also able to distinguish empirically between two competing hypotheses regarding how infor- mation in markets gets incorporated into asset prices. We find that sophisticated investors appear to update their beliefs through a rational expectations mechanism when disagreement arises.


Measuring Managerial Skill in the Mutual Fund Industry

Mutual fund managers’ skill levels can be quantified by the dollar value of the alpha they generate, and the data show that identifiable skill is persistent.


Jonathan Berk, Ph.D.
Stanford University

Jules van Binsbergen, Ph.D.
Stanford University
Research Overview

 

Jonathan Berk, Ph.D.
A.P. Giannini Professor of Finance
Graduate School of Business, Stanford University
Jonathan Berk is the A.P. Giannini Professor of Finance at the Stanford Graduate School of Business (GSB). His research is primarily theoretical in nature and covers a broad range of topics in finance, including delegated money management; the pricing of financial assets; valuing a firm’s growth potential; the capital structure decision; and the interaction between labor markets and financial markets. He has also explored individual rationality in an experimental setting.

Professor Berk has coauthored two finance textbooks: Corporate Finance and Fundamentals in Finance. The first edition of Corporate Finance is the most successful first edition textbook ever published in financial economics, and is a standard text in almost all top MBA programs around the world. At the GSB, he teaches courses in Institutional Money Management and Critical Analytical Thinking.

Professor Berk’s research is internationally recognized and has won numerous awards, including the TIAA-CREF Paul A. Samuelson Award, the Smith Breeden Prize, Best Paper of the Year in the Review of Financial Studies, and the FAME Research Prize. His article, “A Critique of Size-Related Anomalies,” was selected as one of the two best papers ever published in the Review of Financial Studies, and was also honored as one of the 100 seminal papers published by Oxford University Press. In recognition of his influence on the practice of finance, he has received the Graham and Dodd Award of Excellence, the Roger F. Murray Prize, and the Bernstein Fabozzi/Jacobs Levy Award.

He served as an associate editor of the Journal of Finance from 2000-2008, is currently an associate editor of the Journal of Portfolio Management, and is a research associate at the National Bureau of Economic Research. Also, he is a member of the board of directors of the Financial Management Association. Professor Berk received his PhD in finance from Yale University. Before joining Stanford he was the Sylvan Coleman Professor of Finance at Haas School of Business at the University of California, Berkeley. He was born and grew up in Johannesburg, South Africa.

Jules van Binsbergen, Ph.D.
Assistant Professor of Finance
Graduate School of Business, Stanford University
Jules van Binsbergen is an assistant professor of finance at the Graduate School of Business at Stanford University. He conducts theoretical and empirical research in finance. His current work focuses on asset pricing, in particular the relationship between financial markets and the macro economy and the organization, skill and performance of financial intermediaries. Some of his recent research focuses on measuring the skill of mutual fund managers, the term structure of cash flow growth and stock return predictability and the implications of good-specific habit formation for asset prices. His research has appeared in leading academic journals, such as the American Economic Review, the Journal of Finance and the Journal of Monetary Economics.




Using the dollar-value a mutual fund manager adds as the measure of skill, we find that not only does skill exist (the average mutual fund manager adds about $2 million per year), but this skill is persistent, as far out as 10 years. We further document that investors recognize this skill and reward it by investing more capital with skilled managers. Higher skilled managers are paid more and there is a strong positive correlation between current managerial compensation and future performance.


Which News Moves Stock Prices? A Textual Analysis

Using textual analysis, this paper empirically shows a strong relationship between stock price moves and published news.


Jacob Boudoukh, Ph.D.
IDC

Mattew Richardson, Ph.D.
New York University

Ronen Feldman, Ph.D.
Hebrew University
Research Overview

 





Shimon Kogan, Ph.D.
University of Texas at Austin

Jacob Boudoukh, Ph.D.
Professor of Finance
Arison School of Business, IDC
Prof. Boudoukh received his Ph.D. in finance from Stanford University's Graduate School of Business in 1991. Currently he is the Academic Director of the Caesarea Center and a Professor of Finance at the Arison School of Business, IDC. Until 2004 he was Professor of Finance and International Business at the Stern School of Business, NYU. He also served a research fellow at the National Bureau of Economic Research (NBER) in Boston. Jacob’s research focuses on theoretical, empirical and practical aspects of asset pricing, fixed income, derivative securities and risk management. His research was published in leading academic journals such as the American Economic Review, The Journal of Finance, Journal of Financial Economics and The Review of Financial Studies, as well as in practitioners' journals such as the Journal of Fixed Income, Journal of Derivatives and Risk. Through the years Jacob served as a consultant to various global financial institutions such as Deutsche Bank, Merrill Lynch, UBS and Morgan Stanley. He specializes in model driven quantitative trading strategies for global equities, foreign exchange and fixed income. From 1998 to 2002 he served as a member of the Board of Directors and various board committees at Bank Hapoalim.

Matthew Richardson, Ph.D.
Charles Simon Professor of Applied Financial Economics
Stern School of Business, New York University
Matthew Richardson is the Charles E. Simon Professor of Applied Economics in the Finance Department at the Leonard N. Stern School of Business at New York University. He currently holds the position of the Sidney Homer Director of the Salomon Center for the Study of Financial Institutions which is a leading financial research center. Prior to being at NYU, Professor Richardson was an Assistant Professor of finance at the Wharton School of the University of Pennsylvania. In addition, he is a Research Associate of the National Bureau of Economic Research. Professor Richardson has done research in many areas of finance, including both theoretical and empirical work. His research has been published in the American Economic Review, the Journal of Finance, the Review of Financial Studies, and the Journal of Financial Economics, among other places. He was an associate editor of the Journal of Finance, Review of Financial Studies and Journal of Financial and Quantitative Analysis. He recently co-edited two books on the financial crisis titled Restoring Stability: How to Repair a Failed System, Wiley, 2009 and Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, Wiley, November 2010, and is a co-author of Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, Princeton University Press, March 2011. Professor Richardson completed both his bachelor and master degrees in economics concurrently at the University of California at Los Angeles. He received his doctor of philosophy in finance from the Graduate School of Business at Stanford University.

Ronen Feldman, Ph.D.
Professor and Head of Information Systems Department
School of Business Administration, Hebrew University
Matthew Richardson is the Charles E. Simon Professor of Applied Economics in the Finance Department at the Leonard N. Stern School of Business at New York University. He currently holds the position of the Sidney Homer Director of the Salomon Center for the Study of Financial Institutions which is a leading financial research center. Prior to being at NYU, Professor Richardson was an Assistant Professor of finance at the Wharton School of the University of Pennsylvania. In addition, he is a Research Associate of the National Bureau of Economic Research. Professor Richardson has done research in many areas of finance, including both theoretical and empirical work. His research has been published in the American Economic Review, the Journal of Finance, the Review of Financial Studies, and the Journal of Financial Economics, among other places. He was an associate editor of the Journal of Finance, Review of Financial Studies and Journal of Financial and Quantitative Analysis. He recently co-edited two books on the financial crisis titled Restoring Stability: How to Repair a Failed System, Wiley, 2009 and Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, Wiley, November 2010, and is a co-author of Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, Princeton University Press, March 2011. Professor Richardson completed both his bachelor and master degrees in economics concurrently at the University of California at Los Angeles. He received his doctor of philosophy in finance from the Graduate School of Business at Stanford University.

Shimon Kogan, Ph.D.
Assistant Professor of Finance
McCombs School of Business, University of Texas at Austin
Dr. Kogan is an Assistant Professor of Finance at the University of Texas at Austin. Prior to joining the University of Texas, he was on the Carnegie Mellon University Finance faculty and held a number of investment management positions. He earned his MBA and PhD from the University of California at Berkeley and his BA from Tel Aviv University. His research focuses on behavioral finance with application to asset pricing. Dr. Kogan's research appeared in some of the profession's top journals such as the Review of Financial Studies, the Journal of Finance, the American Economic Review, and Management Science, and he was invited to present his work in leading conferences and universities, such as MIT, Harvard, and Yale.



A basic tenet of financial economics is that asset prices change in response to unexpected fundamental information. Since Roll’s (1988) provocative presidential address that showed little relation between stock prices and news, however, the finance literature has had limited success reversing this finding. This paper revisits this topic in a novel way. Using advancements in the area of textual analysis, we are better able to identify relevant news, both by type and by tone. Once news is correctly identified in this manner, there is considerably more evidence of a strong relationship between stock price changes and information. For example, market model R2s are no longer the same on news versus no news days (i.e., Roll’s (1988) infamous result), but now are 16% versus 33%; variance ratios of returns on identified news versus no news days are 120% higher versus only 20% for unidentified news versus no news; and, conditional on extreme moves, stock price reversals occur on no news days, while identified news days show an opposite effect, namely a strong degree of continuation. A number of these results are strengthened further when the tone of the news is taken into account by measuring the positive/negative sentiment of the news story.

ABOUT THE AQR INSIGHT AWARD:

AQR Capital Management recognizes the value of academic research in real-world investment management. Many AQR professionals have roots in academia and we have been applying academic findings to investment portfolios since 1994.

To honor and encourage applied innovation in academic research, the AQR Insight Award, sponsored by AQR Capital Management, recognizes important, unpublished papers that provide the most significant, new practical insights for tax-exempt institutional or taxable investor portfolios. Up to three papers share a $100,000 prize.

Contact: insightaward@aqr.com 

 

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