Working papers

« The Predominance of Real Estate in the Household Portfolio», with Sebastien Betermier

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This paper investigates why household portfolios are heavily skewed toward real estate. Previous studies suggest that the large portfolio share of real estate primarily stems from non-investment-related motives as homeowners are often forced to invest heavily to buy the home they want to consume. In contrast, we show that homeowners would still invest the bulk of their wealth in real estate in a frictionless setting where they could own and consume separate amounts of housing. We provide empirical support to this argument and derive a dynamic portfolio model to study why real estate has such a strong investment appeal.

« The Cross-Sectional Distribution of Mutual Fund Skill Measures», with Patrick Gagliardini and Olivier Scaillet

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We develop a simple, non-parametric approach for estimating the entire distribution of skill. Our approach avoids the challenge of correctly specifying the distribution, and allows for a joint analysis of multiple measures—a key requirement for examining skill. Our results show that more than 85% of the funds are skilled at detecting profitable trades, but unskilled at overriding capacity constraints. Aggregating both skill dimensions using the value added, we find that around 70% of the funds are able to generate profits. The average value added after funds have reached their long-term size equals 7.1 mio. per year, which represents two thirds of the optimal value predicted by neoclassical theory. For all skill measures, the distribution is highly non-normal and reveals a strong heterogeneity across funds.

« The Economic Gains from Predicting Returns of Multiple Assets »

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This paper determines the economic gains from predicting the returns of multiple assets. I set up a scenario where active investors receive timing or selectivity signals, and compute the economic gains they generate. The results reveal that investors with selectivity skills take more aggressive portfolio decisions, and, therefore, produce significantly larger gains. When predictive signals are persistent, the impact on short-term performance can be positive, in contrast to the single-asset case. In the long-run, however, this impact is always negative. Finally, moderate levels of estimation risk and trading costs–when considered jointly–greatly decrease performance. It implies that small levels of predictability do not necessarily produce large economic gains, as previously documented.

« Hedge Fund Performance Under Misspecified Models» with David Ardia, Patrick Gagliardini and Olivier Scaillet (in progress)