Kent Daniel

The Cross-Section of Risk and Returns

Review of Financial Studies · 2020 · 141 citations

Abstract A common practice in the finance literature is to create characteristic portfolios by sorting on characteristics associated with average returns. We show that the resultant portfolios are likely to capture not only the priced risk associated with the characteristic but also unpriced risk. We develop a procedure to remove this unpriced risk using covariance information estimated from past returns. We apply our methodology to the five Fama-French characteristic portfolios. The squared Sha…

Declining CO ₂ price paths

Proceedings of the National Academy of Sciences · 2019-10-01 · 120 citations

Pricing greenhouse-gas (GHG) emissions involves making trade-offs between consumption today and unknown damages in the (distant) future. While decision making under risk and uncertainty is the forte of financial economics, important insights from pricing financial assets do not typically inform standard climate-economy models. Here, we introduce EZ-Climate, a simple recursive dynamic asset pricing model that allows for a calibration of the carbon dioxide ([Formula: see text]) price path based on…

Monetary Policy and Reaching for Income

The Journal of Finance · 2021 · 92 citations

ABSTRACT Using data on individual portfolio holdings and on mutual fund flows, we find that low interest rates lead to significantly higher demand for income‐generating assets such as high‐dividend stocks and high‐yield bonds. We argue that this “reaching‐for‐income” phenomenon is driven by investors who follow the “living off income” rule‐of‐thumb. Our empirical analysis shows that this preference for current income affects both household portfolio choices and the prices of income‐generating as…

Liquidity regimes and optimal dynamic asset allocation

Journal of Financial Economics · 2019-09-26 · 50 citations

A Theory of Costly Sequential Bidding

European Finance Review · 2018-04-18 · 50 citations

Abstract We model sequential bidding in a private value English auction when it is costly to submit or revise a bid. We show that, even when bid costs approach zero, bidding occurs in repeated jumps, consistent with certain types of natural auctions such as takeover contests. In contrast with most past models of bids as valuation signals, every bidder has the opportunity to signal and increase the bid by a jump. Jumps communicate bidders’ information rapidly, leading to contests that are complet…