Working papers

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

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Despite the well-known benefits of diversification, homeowners invest mostly in their home. A common explanation for this pattern is that homeowners are constrained to fully own the home they want to live in. We refute this explanation and show that the predominance of housing stems from its distinct investment value. We then provide clarity on the value of the housing investment. Because owning a home provides a steady stream of housing consumption, it is equivalent to purchasing a perpetual bond indexed to that home. Housing thus plays a special role in the portfolio as one of the homeowner’s risk-free assets.

« Hedge Fund Performance when Models are Misspecified » with David Ardia, Patrick Gagliardini and Olivier Scaillet

Winner of the 2022 Best Asset Pricing Paper Award at the Annual French Finance Association Meeting

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Evaluating the performance of hedge funds is challenging because any benchmark model is unlikely to capture their numerous strategies. To assess the impact of model misspecification, we develop a novel approach to formally compare hedge fund models. This comparison sharpens performance evaluation by improving the separation between pure alphas and factor exposures. We find that the standard models deliver the same performance as the simplest benchmark—the CAPM. In contrast, a parsimonious model based on economically motivated factors (including carry, time-series momentum, and variance) tracks alternative hedge fund strategies and achieves a sizable performance reduction relative to the CAPM.