Download The International Spillover effects of pension finance in an EMU

Who are the Value and Growth Investors?
Sebastien Betermier, Laurent E. Calvet, and Paolo Sodini
Discussion by Frank de Jong
Tilburg University
9th Financial Risks Forum, 21-22 March 2016
1
Summary
 Using very detailed data on individual stock
holdings, the paper finds strong patterns in value
vs. growth investments

There is a strong age effect, with young
investors having a negative value tilt and older
investors a positive value tilt

Wealthier investors and investors with less
idiosyncratic risk also show a more positive
value tilt
 The paper argues that these effects are consistent
with many risk-based and behavioral theories

My comments focus on these explanations
2
Risk based explanations
 Value investing as:

hedge against poor future returns

hedge against changes in human capital

background risk
3
Intertemporal hedging
 Value investments could be a hedge against poor
future returns
 According to the paper, high value returns predict
higher risk premiums
 That would imply a negative intertemporal hedging
demand for value stocks

And more so for investors with a long horizon, if
the predictability is persistent (is that the case?)
 This seems consistent with the findings that young
investors have a negative exposure to value
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Human capital hedge
 Most of a young person’s wealth is the present
value of future labor income (human capital)
 This position is non-traded and induces hedge
demands for assets that have negative correlation
with human capital returns (Eiling, JF, 2013)
 Human capital returns are proxied by labor income
growth
 So, the prediction is that young people will have a
negative value tilt when the covariance between
labor income growth and value returns is positive

Is that the case? I don’t see any evidence on
this in the paper. What do other papers say?
5
Background risk
 Not sure, the argument seems to assume that
investing in the market portfolio is efficient, and
deviating from that brings idiosyncratic risk
 Even if this is the correct view, both positive and
negative tilts bring idiosyncratic risk; this cannot
explain the upward sloping age and wealth
patterns
 Effects of background risk on portfolio allocations
and welfare losses are generally small anyway, so
this is unlikely to explain the value premium
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An Equilibrium Model with Buy and Hold
Investors
Tao Wu
Discussion by Frank de Jong
Tilburg University
9th Financial Risks Forum, 21-22 March 2016
7
Summary
 The paper derives equilibrium expected returns,
risk premiums and volatilities in an economy with
two assets (bond and stock) and two traders

Trader 1 is unrestricted

Trader 2 follows a buy-and-hold strategy
 The sub-optimal asset allocation of trader 2 leads
to higher marginal utility and, in equilibrium, to a
higher equity premium and Sharpe ratio
8
Comments
 The paper summarizes the effect of the buy-andhold investor in two additional state variable,
capturing the fraction of stocks held by the buyand-hold investor, η(t), and the “exchange rate”
between the consumption of both investors, λ(t)
 This makes the problem Markovian and it can be
solved
 But this makes the investment opportunity set for
the investors stochastic, and I expected the state
variables to show up in asset demands

Intertemporal hedging effects
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Comments
 The parameter choices for the comparative statics
seem fairly extreme:

Investment horizon is T=50 years; but it seems
quite extreme never to rebalance a portfolio
over such a long horizon

With more frequent rebalancing, welfare losses
and pricing effects are typically fairly small, see
e.g. Ang, Papanikolaiou and Westerfield
 Investors are willing to forego 2% of their wealth to hedge
against illiquidity crises occurring once every ten years.
 Also, η(t)=1 and λ(t)=4 seem extreme and unlikely
to appear in this economy

Simulate the model to generate ‘reasonable’ paths
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