AQR Insight Award


The AQR Insight Award, sponsored by AQR Capital Management, recognizes important, unpublished papers that provide the most significant, new practical insights for tax-exempt institutional or taxable investor portfolios.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.

Overview

The AQR Insight Award — now in its seventh year—honors exceptional academic papers that offer original, intelligent approaches to issues in the investment world.  Every year, we receive submissions from top academics from around the world. After a rigorous review process, we select the five best and invite the authors to present their new research at AQR. Here’s a look at the 2017 AQR Insight Award presentations.

2017 Award Winners

  1. First Prize


    2017 FIRST PRIZE

    Wenxin Du, Ph.D., Federal Reserve Board; Alexander Tepper, Ph.D., Columbia University; and Adrien Verdelhan, Ph.D., MIT Sloan School of Management 

    Covered interest rate parity (CIP) is the condition that requires the interest rates to be the same across countries once the exchange rate risk has been hedged away. This idea has been around since at least 1923 when discussed by John Maynard Keynes. Research since then has confirmed that this no-arbitrage condition had been satisfied most of the time before the 2008 Global Financial Crisis. Since the crisis, however, the CIP condition has been persistently violated among G10 currencies, resulting in potentially significant arbitrage opportunities among the largest and most liquid derivative markets in the world.  The violation of CIP creates an interesting puzzle for financial economists and regulators. The authors explore this oddity and find that it is linked to cross-country differences in interest rates and caused, at least partially, by banking regulatory reporting changes. Their findings have implications for the optimal investment of global cash balances, the financing of debt by global firms, and the functioning and regulation of global banks.

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    Presentation
  2. Honorable Mention


    2017 HONORABLE MENTION

    Ralph S.J. Koijen, Ph.D., New York University Stern School of Business, CEPR and NBER, and Motohiro Yogo, Ph.D., Princeton University and NBER

    While demand curves are an important part of economic theory, they have not played a large role in empirical asset pricing which has focused directly on prices and returns.  Due largely to the empirical difficulty in estimating demand for financial securities, the finance literature has instead abstracted from the demands that drive prices. In this paper, the authors take up this ambitious and challenging task using a well-crafted model to tie price movements to demanded quantities (shares) in order to better understand asset market movements, volatility, and predictability. The authors develop a framework used extensively in industrial organization to model demand for U.S. stocks across different investors. They then use this model to back out expected return estimates that can help explain the role institutions play in driving asset volatility.

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    Presentation
  3. Honorable Mention


    2017 HONORABLE MENTION

    Zhongjin Lu, Ph.D., University of Georgia Terry College of Business and Scott Murray, Ph.D., Georgia State University J. Mack Robinson College of Business

    Investors naturally prefer to avoid the impact of poor market states and the accompanying portfolio drawdowns. Consequently, intuition and theory suggest that investors’ preference for investments that do well during bear markets will be priced at a premium — outperforming during poor market states (and thus providing downside protection) comes at the cost of earning low average returns over the long term. The authors seek to estimate this tradeoff. They test the performance of stocks over several market cycles and find that stocks that outperform during bear markets also underperform on average over time.  The authors identify a new priced risk factor, which they call the bear factor, that is able to predict stock sensitivity to future bear markets and that negatively relates to expected stock returns on average.

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    Presentation
  4. Honorable Mention


    2017 HONORABLE MENTION

    Kent Daniel, Ph.D., Columbia Business School and NBER, Alexander Klos, Ph.D., Kiel University and Kiel Institute for the World Economy, Simon Rottke, Ph.D., FCM, University of Münster

    Stocks with low institutional ownership which, over a one-year period leading up to portfolio formation, earn strong positive returns and experience a simultaneous increase in short interest, subsequently earn strikingly low returns over the following five years. The authors argue that the high prices of this set of “overpriced winners” are a result of excessive optimism by a group of investors and arbitrage constraints.

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  5. Honorable Mention


    2017 HONORABLE MENTION

    Ian Martin, Ph.D., London School of Economics and Christian Wagner, Ph.D., Copenhagen Business School

    There is, of course, an expansive literature concerned with determining future returns on assets.  The contribution of this paper is the derivation of a formula motivated by theory that calculates the expected return on a stock computed solely from index and stock option prices.  Unlike typical asset pricing models it does not require historical estimation of various parameters like factor loadings, which are inherently difficult to measure and prone to error. Interestingly, the authors find that the model performs well at various forecast horizons, both within and out of sample, and captures information beyond that of well-known predictors including beta, book-to-market, and momentum.  The authors argue that expected returns on individual stocks are more volatile than previously understood, both over time and across stocks.

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    Presentation