Alexi Savov Ph.D. Candidate in Finance asavov@chicagobooth.edu
Research interests Asset pricing with asymmetric information; endogenous noise trading. Consumption-based asset pricing, especially non-market consumption. Empirical asset pricing.
Experience Curriculum Vitae
Research in progress Free for a Fee: The Hidden Cost of Index Fund Investing (Job market paper) I present and test a rational expectations model consistent with the empirical finding that on a buy-and-hold basis active funds underperform index funds by their incremental fees. Investors receive nontradable wealth shocks whose aggregate component is not publicly observed, which makes prices "noisy" in the sense of Grossman and Stiglitz (1980). Index fund investors optimally respond to these shocks in a way that is systematically related to stock mispricing, mistiming the market. A set of informed active funds times the market correctly but charges active fees. To make investors indifferent between active and index funds, the net return on active funds is close to the index fund return after adjusting for the endogenous negative market timing of index fund investors. Since the active fees leave the system, both returns are below the benchmark, which is also the buy-and-hold index fund return. The model predicts that after controlling for the timing of investment, index fund returns should fall whereas active fund returns should not, and the two should become roughly equal. Consistent with the model, in the data unusually high flows into index funds forecast both low returns and low index fund returns relative to active fund returns. This differential effect can account for most of the buy-and-hold advantage of index funds. Asset Pricing with Garbage (Forthcoming, The Journal of Finance) A new measure of consumption—garbage—is more volatile and more correlated with stocks than the standard measure, NIPA consumption expenditure. A garbage-based CCAPM matches the U.S. equity premium with relative risk aversion of 17 versus 81 and evades the joint equity premium-risk-free rate puzzle. These results carry through to European data. In a cross section of value, size and industry portfolios, garbage growth is priced and drives out NIPA expenditure growth. Wall Street Journal article Internet Appendix Slides The Puzzle of Index Option Returns (With George Constantinides and Jens Jackwerth) We find that the leverage-adjusted returns on S&P 500 index calls and puts are decreasing in their strike-to-price ratio over 1986-2007, contrary to the prediction of the Black-Scholes-Merton model. A large number of factor models fail to explain the cross-section of option returns. Two option-specific factors, the change in the monthly out-of-the-money put volume and the change in the VIX index, have some explanatory power when their premia are estimated from the universe of options but large alphas remain when their premia are estimated from equities.