# Research articles for the 2019-03-16

A Critique of Momentum Anomalies

SSRN

This paper offers theoretical, empirical, and simulated evidence that momentum regularities in asset prices are not anomalies. Within a general, frictionless, rational expectations, risk-based asset pricing framework, riskier assets tend to be in the loser portfolios after (large) increases in the price of risk. Hence, the risk of momentum portfolios usually decreases with the prevailing price of risk, and their risk premiums are approximately negative quadratic functions of the price of risk (and the market premium) theoretically truncated at zero. The best linear (CAPM) function describing this relation unconditionally has exactly the negative slope and positive intercept documented empirically.

SSRN

This paper offers theoretical, empirical, and simulated evidence that momentum regularities in asset prices are not anomalies. Within a general, frictionless, rational expectations, risk-based asset pricing framework, riskier assets tend to be in the loser portfolios after (large) increases in the price of risk. Hence, the risk of momentum portfolios usually decreases with the prevailing price of risk, and their risk premiums are approximately negative quadratic functions of the price of risk (and the market premium) theoretically truncated at zero. The best linear (CAPM) function describing this relation unconditionally has exactly the negative slope and positive intercept documented empirically.

Ecoregional Investment and Incentive Compensation Under Responsibility Risk

SSRN

I study optimal capital allocation and compensation mechanisms in a setting in which a firm with access to a single investment project in an ecoregion may engage in environmental violations, and the ecoregionÃ¢€™s proprietor (say local government) with preferences for ecological protection privately observes the process audit effort level. I show that given linear compensation schemes, the optimal solution is to set the non-negative share of project cash flows larger than 100% while the fixed component negative. I also show that the incentive-compatible mechanism gives rise to the overinvestment and overexploitation problems relative to the first-best level, and both problems become smaller as process audit effort level increases. Finally, I investigate how the model may vary with relevant characteristics such as multi-resource requirement, risk-averse government, and verifiable process audit information.

SSRN

I study optimal capital allocation and compensation mechanisms in a setting in which a firm with access to a single investment project in an ecoregion may engage in environmental violations, and the ecoregionÃ¢€™s proprietor (say local government) with preferences for ecological protection privately observes the process audit effort level. I show that given linear compensation schemes, the optimal solution is to set the non-negative share of project cash flows larger than 100% while the fixed component negative. I also show that the incentive-compatible mechanism gives rise to the overinvestment and overexploitation problems relative to the first-best level, and both problems become smaller as process audit effort level increases. Finally, I investigate how the model may vary with relevant characteristics such as multi-resource requirement, risk-averse government, and verifiable process audit information.

The Risk-Based Core for Cooperative Games With Uncertainty

SSRN

In coalitional games with uncertain payoffs, a deviating coalition can only form expectations regarding its post-deviation payoff. Classical approaches address the problem from the side of conservatism, expecting the worst, or by explicit assumptions of the emerging state of the world. We borrow the idea of risk from the finance literature and compare the payoff of staying with the original outcome with the risk of deviating. Employing this idea to the core leads to a new concept that we call the risk-based core. We introduce this concept and discuss its properties. We find an inclusion relation between cores of games with increasingly conservative players.The model is also suitable to study cooperative games in partition function form where the value of a coalition depends on the entire partition. For the cores of such games our main result yields many of the familiar inclusion relations as corollaries, while the inclusion of the optimistic core in the optimistic recursive core turns out to be non-robust.

SSRN

In coalitional games with uncertain payoffs, a deviating coalition can only form expectations regarding its post-deviation payoff. Classical approaches address the problem from the side of conservatism, expecting the worst, or by explicit assumptions of the emerging state of the world. We borrow the idea of risk from the finance literature and compare the payoff of staying with the original outcome with the risk of deviating. Employing this idea to the core leads to a new concept that we call the risk-based core. We introduce this concept and discuss its properties. We find an inclusion relation between cores of games with increasingly conservative players.The model is also suitable to study cooperative games in partition function form where the value of a coalition depends on the entire partition. For the cores of such games our main result yields many of the familiar inclusion relations as corollaries, while the inclusion of the optimistic core in the optimistic recursive core turns out to be non-robust.