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Essays in empirical asset pricing

Salarkia, Amirabas (2023) Essays in empirical asset pricing. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004512


The first chapter investigates how household income risk influences mutual fund managers’ portfolio decisions. I provide novel empirical evidence that state-level local income shocks affect capital flows to retail mutual funds. By analyzing portfolio holdings data, I find that active fund managers hedge local income shocks by tilting their portfolios away from high local income beta stocks. I also show that the trade-off between income hedging and local bias can help explain the local bias puzzle. In the second chapter, we study which asset pricing model firm managers use. Since firms time the stock market through equity net issuance, the direction of net issuance reveals the firm’s net present value calculation and an asset pricing model most likely to be used in the calculation. Based on this insight, we develop a test that infers an asset pricing model most likely used by firms from the net issuance decision. We find that the CAPM explains the decision better than other factor models or market multiples. Our results are not driven by issuance due to external financing needs and are true even for firms with an extreme size or value characteristic. The third chapter, I present a novel approach for estimating the intrinsic value of stocks. Specifically, I construct an exponentially affine stochastic discount factor (SDF) model that captures the term structure of interest rates. This method enables me to systematically integrate macroeconomic data on sources of risk into the valuation model. By comparing the performance of the estimated value-to-price ratio to traditional market multiples, I demonstrate its superior predictive power for short-term market returns in both in-sample and out-of-sample tests.

Item Type: Thesis (PhD)
Additional Information: © 2023 Amirabas Salarkia
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Finance
Supervisor: Lou, Dong and Cho, Thummim

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