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Andrea Frazzini

AQR Capital Management, LLC

Two Greenwich Plaza, 3rd Floor

Greenwich, Connecticut 06830

 

Adjunct Associate Professor of Finance

Leonard N. Stern School of Business

44 West 4th Street, 9-150

New York, NY 10012

 

Email:

 

 

 

Curriculum Vitae      In the News       Teaching MBA (restricted)     Teaching PHD (restricted)

 

 

Research (Google Scholar)

 

 

Embedded Leverage" (with Lasse H. Pedersen), 2011. AQR Working paper

Many financial instruments are designed with embedded leverage such as options and leveraged exchange traded funds (ETFs). Embedded leverage alleviates investors’ leverage constraints and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis, we find that asset classes with embedded leverage offer low risk-adjusted returns and, in the cross-section, higher embedded leverage is associated with lower returns. A portfolio which is long low-embedded-leverage securities and short high-embedded-leverage securities earns large abnormal returns, with t-statistics of 8.2 for equity options, 6.3 for index options, and 2.1 for ETFs. We provide extensive robustness tests and discuss the broader implications of embedded leverage for financial economics.

 The Devil in HML’s Details" (with Cliff Asness), 2011. AQR Working paper 

This paper challenges the standard method for measuring “value” used in academic work on factor pricing and behavioral finance. The standard method calculates book-to-price (B/P) at portfolio formation using lagged book data, aligns price data using the same lag (ignoring recent price movements), and holds these values constant until the next rebalance. We propose two simple alternatives that use more timely price data while retaining the necessary lag for measuring book. We construct portfolios based on the different measures for a US sample (1950-2011) and an International sample (1983-2011). We show that B/P ratios based on more timely prices better forecast true (unobservable) B/P ratios at fiscal yearend. Value portfolios based on the most timely measures earn statistically significant alphas ranging between 305 and 378 basis point per year against a 5-factor model itself containing the standard measure of value, as well as market, size, momentum and a short term reversal factor.

Leverage Aversion and Risk Parity" (with Cliff Asness and Lasse H. Pedersen), 2010. Financial Analysts Journal, forthcoming

Leverage aversion changes the predictions of modern portfolio theory: It causes safe assets to offer higher risk-adjusted returns than riskier assets. Consuming the high risk-adjusted returns offered by safe assets requires leverage, creating an opportunity for investors with the ability and willingness to borrow. A Risk Parity (RP) portfolio exploits this in a simple way, namely by equalizing the risk allocation across asset classes, thus overweighting safe assets relative to their weight in the market portfolio. We show empirically that RP has outperformed the market over the last century by a statistically and economically significant amount.

Betting Against Beta" (with Lasse H. Pedersen), 2010. NBER Working Paper No. 16601. Under revision

We present a model with leverage and margin constraints that vary across investors and time. We find evidence consistent with each of the model’s five central predictions: (1) Since constrained investors bid up high-beta assets, high beta is associated with low alpha, as we find empirically for U.S. equities, 20 international equity markets, Treasury bonds, corporate bonds, and futures; (2) A betting-against-beta (BAB) factor, which is long leveraged low-beta assets and short high-beta assets, produces significant positive risk-adjusted returns; (3) When funding constraints tighten, the return of the BAB factor is low; (4) Increased funding liquidity risk compresses betas toward one; (5) More constrained investors hold riskier assets.

 

Hiring Cheerleaders: Board Appointments of "Independent" Directors" (with Lauren Cohen and Christopher Malloy), Management Science, forthcoming

Appendix

Using a unique, hand-collected database of independent directors, we provide evidence that firms appoint independent directors who are overly sympathetic to management, while still technically independent according to regulatory definitions. We explore a subset of independent directors for whom we have detailed, micro-level data on their views regarding the firm prior to being appointed to the board: sell-side analysts who are subsequently appointed to the board of companies they previously covered. We find that boards appoint overly optimistic analysts who are also poor relative performers. The magnitude of the optimistic bias is large: 82.0% of appointed recommendations are strong-buy/buy recommendations, compared to 56.9% for all other analyst recommendations. We find that appointed analysts’ optimism is stronger at precisely those times when firms’ benefits are larger, and that appointing firms increase earnings management, and perform poorly, following these board appointments.

 

 Sell Side School Ties(with Lauren Cohen and Christopher Malloy), 2010.  Journal of Finance , 65 , 1409 – 1437

Smith Breeden  Distinguished Paper Prize , 2011

We study the impact of social networks on agents’ ability to gather superior information about firms. Exploiting novel data on the educational backgrounds of sell side analysts and senior corporate officers, we find that analysts outperform by up to 6.60% per year on their stock recommendations when they have an educational link to the company. Pre-Reg FD, this school-tie return premium is 9.36% per year, while post-Reg FD the return premium is nearly zero. In contrast, in an environment that did not change selective disclosure regulation (the UK), the school-tie premium is large and significant over the entire sample period.

 

 The Small World of Investing: Board Connections and Mutual Fund Returns” , 2008, (with Lauren Cohen and Christopher Malloy), Journal of Political Economy, Vol. 116, 951-979, 2008

Global Investors Award, Best Paper in Asset Pricing, European Finance Association 2007

This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on firms they are connected to through their network, and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 8.4% per year. Returns are concentrated around corporate news announcements, consistent with mutual fund managers gaining an informational advantage through the education networks. Our results suggest that social networks may be an important mechanism for information flow into asset prices.

 

 

 

The Earnings Announcement Premium and Trading Volume  (with Owen Lamont), December 2006, NBER Working paper w13090.

On average, stock prices rise around scheduled earnings announcement dates. We show that this earnings announcement premium is large, robust, and strongly related to the fact that volume surges around announcement dates. Stocks with high past concentration of trading activity around earnings announcement dates earn the highest announcement premium, suggesting some common underlying cause for both volume and the premium. We show that high premium stocks experience the highest levels of imputed small investor buying, suggesting that the premium is driven by buying by small investors when the announcement catches their attention.

 

Economic Links and Predictable Returns  (with Lauren Cohen). Journal of Finance, 2008, vol. 63, issue 4, pages 1977-2011
Appendix. Appendix containing results on supplier momentum, analysts’ revisions and cross-industry momentum

Smith Breeden  Distinguished Paper Prize , 2008
First Prize, Chicago Quantitative Alliance Academic Paper Competition, 2006
BSI Gamma Foundation Grant, Firm Characteristics and Investment Management, 2006

This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating return predictability across assets. We use a dataset of firms’ principal customers to identify a set of economically related firms, and show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long/short equity strategy based on this effect yields monthly alphas of over 150 basis points. 

 

 

 

Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns  (with Owen Lamont), 2006. Journal of Financial Economics , Volume 88, Issue 2, May 2008, Pages 299-322

Second Prize: Fama/DFA Prize for Capital Markets and Asset Pricing, 2008

We use mutual fund flows as a measure for individual investor sentiment for different stocks, and find that high sentiment predicts low future returns at long horizons. Fund flows are dumb money: by reallocating across different mutual funds, retail investors reduce their wealth in the long run. This dumb money effect is strongly related to the value effect. High sentiment also is associated high corporate issuance, interpretable as companies increasing the supply of shares in response to investor demand.

 

 

 

The Disposition Effect and Under-reaction to News, Journal of  Finance  • Vol. LXI, No. 4 • August 2006

First Prize, Chicago Quantitative Alliance Academic Paper Competition, 2004

First Prize, PanAgora Asset Management Crowell Memorial Prize Competition , 2004-2005

This paper tests whether the “disposition effect,” that is the tendency of investors to ride losses and realize gains, induces “underreaction” to news, leading to return predictability. I use data on mutual fund holdings to construct a new measure of reference purchasing prices for individual stocks, and I show that post-announcement price drift is most severe whenever capital gains and the news event have the same sign. The magnitude of the drift depends on the capital gains (losses) experienced by the stock holders on the event date. An event-driven strategy based on this effect yields monthly alphas of over 200 basis points.

 

 

 

Stockscreen: Hitting The Links, SmartMoney, 1 December 2007.

Too much information - Buttonwood, The Economist, 14 July 2007.

7 Money Mistakes To Avoid, SmartMoney, 1 July 2007.

Point of View: Study Finds Money In Those Old School Ties, Dow Jones News Service, 12 June 2007.

Quantifying the Role of Old-School Ties in Investing, The New York Times, 9 June 2007.

Blame the Fund Manager, or the Face in the Mirror? The New York Times, 2/26/2006
Dumb Money, Forbes, 19 September 2005
Stockscreen: Cut Your Losses; Ride Your Winners, SmartMoney, 8/1/2005
A Connection Premium? The New York Sun, 10 July 2008

Andrea Frazzini; Equities Pensions & Investments, 12 May 2008

Investment Adviser: Don't look back, let fees do the talking. Investment Adviser

Business Day (South Africa): Let dumb money point the way. Business Day

Study Finds Money In Those Old School Ties Dow Jones News Service, 12 June 2007

Skippers Favour Companies With University Ties , Money Management Executive, 16 April 2007,

Stockscreen: Cut Your Losses; Ride Your Winners --- New research supports an old adage: Don't fight the tape SmartMoney, 1 August 2005

 

 


 

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