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Working Paper

Is Capital Structure Irrelevant with ESG Investors?

We examine whether capital structure is irrelevant for enterprise value and investment when investors care about ESG issues, which we denote “ESG-Modigliani-Miller” (ESG-MM). Theoretically, we show that ESG-MM holds if ESG is additive and markets are perfect. Empirically, we provide evidence of failure of ESG-MM, implying that firms and governments can exploit non-additive ESG or segmented markets.

Working Paper

Machine Learning and the Implementable Efficient Frontier

We propose that investment strategies should be evaluated based on their net-of-trading-cost return for each level of risk, which we term the "implementable efficient frontier." While numerous studies use machine learning return forecasts to generate portfolios, their agnosticism toward trading costs leads to excessive reliance on fleeting small-scale characteristics, resulting in poor net returns. We develop a framework that produces a superior frontier by integrating trading-cost-aware portfolio optimization with machine learning

Working Paper

Is There a Replication Crisis in Finance?

Several papers argue that financial economics faces a replication crisis because many studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication that leads to different conclusions, including finding the majority of asset pricing factors can be replicated.

Working Paper

Game On: Social Networks and Markets

This paper studies how echo-chamber effects and fake news can lead to disagreement and misinformation with effects on investors’ portfolios and market prices. It presents a model how an investment idea can propagate through a social network, generating a trading frenzy with high turnover, a bubble in the price, and high price volatility. The paper also presents empirical evidence on the dramatic events related to the GameStop stock in January 2021 and discusses broader economic implications.

Working Paper

Does ESG Help or Hurt Returns?

Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing.

Data Set

Responsible Investing: The ESG-Efficient Frontier – Original Paper Data

This the original data set used in “Responsible Investing: The ESG-Efficient Frontier” (Pedersen, Fitzgibbons and Pomorski). It contains the total returns of the value-weighted and equal-weighted portfolios used in the paper.

Journal Article

Principal Portfolios

We propose a new asset-pricing framework in which all securities’ signals are used to predict each individual return. While the literature focuses on each security’s own- signal predictability, assuming an equal strength across securities, our framework is flexible and includes cross-predictability.

Journal Article

Enhanced Portfolio Optimization

We show how to identify the portfolios that cause problems in standard mean-variance optimization (MVO) and develop an enhanced portfolio optimization (EPO) method that addresses the problems. Applying EPO on several realistic datasets, we find significant gains relative to standard benchmarks.

Journal Article

Fact and Fiction About Low-Risk Investing

Low-risk investing has received a lot of attention over the past decade. An intensive academic debate has spurred, and been spurred by, the growing market for low-risk strategies. This article presents five fact and dispels five fictions about low-risk investing.

Working Paper

Responsible Investing: The ESG-Efficient Frontier

Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing.