PhD., Economics, Yale University,
May 2003
M.Phil., Economics, Yale University, May 2002
M.A., Economics, Yale University, May 2001
B.Sc., Economics (valedictorian), University of Cyprus, June 1998 |
Cowles Prize, Cowles Foundation
for Economic Research, Yale University, May 2002 and 2000
Yale University Graduate Fellowship, 1998–2002
Prize of the President of the Republic of Cyprus for Academic Excellence, June 1998
Four Awards of academic excellence, Department of Economics, University of Cyprus,
1994–1998
Valedictorian, University of Cyprus, June 1998
Silver World Medal of London Chamber of Commerce & Industry for Bookkeeping and
Accounts, Spring 1991 |
Professor George M. Constantinides
University of Chicago GSB
5807 South Woodlawn Avenue
Chicago, IL 60637
Phone: (773) 702-7258
Fax: (773) 702-0458
Email: gmc@chicagogsb.edu
Professor Paul Schultz
Department of Finance
University of Notre Dame
260 Mendoza College of Business
Notre Dame, IN 46556
Phone: (574) 631-3338
Fax: (574) 631-5255
Email: Paul.H.Schultz.19@nd.edu |
Professor Sydney Ludvigson
Department of Economics
New York University
269 Mercer Street, 7th floor
New York, NY 10003
Phone: (212) 998-8927
Fax: (212) 995-4186
Email: sydney.ludvigson@nyu.edu Professor
Peter C. B. Phillips
Department of Economics, Yale University
P.O.Box 208281
New Haven, CT 06520-8281
Phone: (203) 432-3695
Fax: (203 432-6167
Email: peter.phillips@yale.edu
|
My research is focused in two main
areas: the analysis of portfolio and consumption choices, and the empirical determination
of asset prices. The first research program is related to individual decisions with
respect to portfolio selection and consumption choices. The novel feature of this research
is to build and test theories that incorporate findings from the psychology literature
that are related to individual behavior. In particular, one study tests for the impact of
cognitive aging on investment skill, and another study builds a model that allows
satisfaction from the mere action of saving. The second research program is related to the
determination of U.S. asset prices with factors reflecting the macroeconomic conditions of
the U.S. These factors capture the fact that individuals have consumption habits, which
are determined by the general consumption level, and they face income shocks, which cannot
be fully insured. This work is related to two other papers. On the one hand, since habit
formation is important for asset pricing, I develop an estimator that enables testing for
habit formation. This methodology combines in a novel way different strands of the
economic and econometric literature, to develop a unique estimation procedure with wide
applicability. On the other hand, I investigate how much income risk an individual can
diversify using financial instruments. The income risk, which I study, refers to the risks
faced from living in a particular geographical area. Finally, in a paper, which is
related to both of my research areas, I test the implications of local bias for
stock-market predictability
Portfolio and Consumption Choices
Cognitive aging is widely documented in the psychology literature. In the study "Does
Investment Skill Decline due to Cognitive Aging or Improve with Experience?"
(with Alok Kumar), we focus on the stock investment choices of older investors. Consistent
with the theoretical predictions of life cycle and learning models, we find that older and
more experienced investors hold less risky portfolios, exhibit stronger preference for
diversification, trade less frequently, and exhibit greater propensity for year-end
tax-loss selling. However, consistent with the psychological evidence on cognitive aging,
we find that: (i) older investors have worse stock selection ability and poor
diversification skill, and (ii) these adverse aging effects are stronger among older
investors who are relatively less educated, earn lower income, and belong to a minority
ethnic group. The economic costs of aging are significant — older investors earn
roughly 2% lower annual returns on a risk-adjusted basis. Collectively, our results are
consistent with the hypothesis that older investors’ portfolio choices reflect
greater knowledge about investing but their investment skill deteriorates with age due to
declining cognitive abilities.
Experimental studies find that individuals derive satisfaction from the act of saving. The
paper "Rewards from Savings and Consumption Choices," extends the
traditional life cycle hypothesis to allow for rewards from savings. Therefore, its
preference structure depends both on consumption and additions to the saving stock. The
new model produces a consumption decision rule that is characterized by differing marginal
propensities to consume from different wealth categories (in contrast to the traditional
model, which implies that individuals consume a constant proportion of their total
wealth). Therefore, the model offers a mechanism that can endogenously give rise to mental
accounts. The mental accounting result is robust to adding precautionary savings or
liquidity constraints to the consumption model. Finally, the model explains a series of
empirical regularities not captured by the traditional life cycle model.
Empirical Asset Pricing
Recently, there has been a renewed interest in consumption asset pricing models (CCAPM),
driven by the success of the incomplete markets model of Constantinides and Duffie (1996),
and the external habit formation model of Campbell and Cochrane (1999). Incomplete markets
stem from uninsurable income shocks, and external habit formation reflects the act of
"keeping-up with the Joneses." Clearly, an important research question is
whether some combination CCAPM performs even better than these two models taken
separately. In pricing expected returns, the paper "Does External Habit Explain
Expected Returns When Markets Are Incomplete?" shows that the combination model
performing the best is not the one that simply adds the U.S. habit measure of Campbell and
Cochrane (1999) to the incomplete markets model. This simple extension is limiting because
the habit is identical across agents; it is based on U.S. consumption. The combination
CCAPM performing the best is the one where the habit differs across agents and it is based
on regional and not national consumption. This model implies four macroeconomic asset
pricing factors: the cross-sectional means and variances of the consumption and habit
growth rates. These factors are priced because they capture business cycle information.
More importantly they can price expected returns as well as the Fama and French (1993)
factors, and the momentum factor of Jegadeesh and Titman (1993) and Carhart (1997).
Models that allow for habit formation are becoming increasingly important in economics and
finance. The paper "A Dynamic Panel Estimator with Both Fixed and Spatial Effects"
proposes a novel procedure to estimate the implication of such models. The paper
introduces a new estimator for dynamic panel models with fixed and spatial effects. Such
econometric regressions are closely related to the Euler equations of consumption models
with habit formation. The estimator is based on the bias adjusted least-square
dummy-variable estimator of Hahn and Kuersteiner (2002). More importantly, it is shown to
be consistent and asymptotically normal. Two tests demonstrate its behavior. First, it is
applied to U.S. state data to test for internal and external habit formation. Results show
that the impact of habit formation on state consumption growth is significant. Second, a
simulation analysis demonstrates that in finite samples the corrected estimator has low
small-sample bias and standard deviation. It thus performs better than alternative
consistent estimators having the lowest root mean-square error in finite samples.
The literature on incomplete markets recognizes that one of the most important risks that
individuals face is income risk. In the paper "How much Risk Sharing Among U.S.
States is Attainable using Common Financial Assets?" (with Alok Kumar), we take
up this issue. In particular, the paper provides conservative upper bound estimates for
state income risk reduction attainable using common financial assets and simple trading
strategies. During the 1963 to 2004 period, about 48% (25%) of state-specific income risk
could have been diversified using equity (bond) instruments alone, while an equity-bond
portfolio is able to generate about 58% risk reduction. Return spreads are more effective:
The Commercial Paper to Treasury Bill (Baa to Aaa corporate bonds) spread alone can
generate 64–69% (63–67%) risk reduction. And surprisingly, financial assets are
even more effective in reducing the total state income risk (risk sharing is about
67–76%), which includes the national income risk. Across the U.S. states, the
risk-return characteristics of "income assets" vary but financial assets are
equally effective in reducing the income risk. Collectively, our evidence suggests that
financial markets can potentially improve social welfare by facilitating higher levels of
risk reduction among U.S. states.
Recent studies that use individual trading data find that retail investors tend to bias
their portfolios towards stocks of firms headquartered close to their residence (Coval and
Moskowitz 1999; Grinblatt and Keloharju 2000, Huberman 2001, Zhu 2003, and Ivkovic and
Weisbenner 2004). Even if local bias is a well-established fact, little is known
about its asset pricing implications (Pirinsky and Wang 2004; Hong, Kubic and Stein 2005).
The paper "Return Predictability under Local Bias" makes
a contribution to this literature. The paper shows that U.S. state returns are
predictable. More importantly, the deviation of a state return from the market
return is forecasted only by macroeconomic variables of the same state.
These findings support a model with local bias across investors. The state
forecasting variables include the state collateral ratio, which equals to home equity
divided by labor income, and the state unemployment rate. Beside the state
variables, raw state returns and state returns over the Treasury bill return are
forecasted by the deviation of U.S. consumption from its trend with U.S. wealth. |