Three essays on risk, uncertainty, and expected returns

Date
2015
Authors
Ehsani, Sina
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Abstract

The first chapter of this dissertation explores the effects of the recent rise of passive investing on the U.S. stock market. The analysis establishes a strong relation between passive investment and aggregate price dynamics such as systematic volatility, idiosyncratic volatility, and price synchronicity, suggesting that investors should consider trading activity of passive products in decision making. The second chapter examines the pricing of characteristics and betas in the cross-section of expected corporate loan returns. Despite the increasing popularity of the secondary loan market among institutional investors, this market is unexplored in the context of empirical asset pricing literature. This comprehensive study takes the first step to fill the gap by investigating the sources of risk and predictability of corporate loan returns. We find that one loan specific characteristic, momentum, and one covariance-based characteristic, default beta, explain the cross-section of loan expected returns. The final chapter first introduces a measure of model uncertainty regarding the future return distribution of the U.S. stock market and then examines the pricing of model uncertainty in the cross-section of stock returns.

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Keywords
Expected Returns, Idiosyncratic Volatility, Market Volatility, Passive Trading, Syndicated Corporate Loan Market, Uncertainty
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Department
Finance