I have been researching issues having to do with uncertainty and asset pricing. Over the last few years, my research has focused on learning, uncertainty, and in particular on the variation in the risk preferences of agents – I have developed concepts in these fields and used them to explore issues in corporate finance such as the timing of initial public offers (IPO) and IPO waves. I have now shifted my research efforts to the study of incentives in corporations; the paper I presented as part of the doctoral workshop series–“Stock-Based Compensation and CEO (Dis)Incentives”–is part of this new orientation.
The seminar introduces students to the frontier of research in asset pricing and aims to make them comfortable with the pros and cons of various modelling strategies, and their empirical predictions. We cover recent models that have been proposed to shed light on intriguing empirical regularities, such as the equity premium and excess volatility puzzles, the interest rate puzzle, the time series and cross-sectional predictability of returns, stock market bubbles, and we also look at dynamic asset allocation and life-cycle portfolio allocation strategies.
Half of the course is related to issues at the heart of my research expertise: learning and uncertainty, aversion to “ambiguity”, non-additive preferences such as Epstein-Zin utility or habit formation. The other half looks at dynamic portfolio allocation strategies and the relevance of learning for portfolio allocation. While this is something I did not have the opportunity to address in my publications, I have not been short of ideas and I have followed the literature closely. One needs to focus one’s research on a limited number of big ideas.
To get tenured at the University of Chicago, you need to have started at least three different strands of research. One of these is learning and uncertainty; with my co-author Lubos Pastor, we have devoted more than five papers to the interactions between uncertainty and price – which I should underline can be positive: while people usually focus on the downside, uncertainty can be good and prices relate to it. In this spirit, we have studied the price patterns around technical evolution, found that uncertainty about average future profitability was unusually high in the late 1990s, and that the uncertainty needed to match the observed Nasdaq valuations at their peak was high but plausible.
I joined because of René Garcia, the programme’s academic director. I know him personally and he is amazing. I was also acquainted with the work of other people in the core faculty such as Pierre Mella-Barral and Lionel Martellini and looked forward to meeting them; the programme has a very talented team.
I was definitely surprised by the quality of the students. I give this advanced doctoral seminar every other year at the University of Chicago. Knowing about the large proportion of executives in the class, I was worried that the material may be too difficult. It was a relief to find out that students not only were up to the challenge but also had very good questions for me, many of which were very different from those I get in Chicago. This is a pretty smart group of people and I had fun teaching them.