UBC Sauder research from Murray Carlson and Adlai Fisher awarded Runner-up for Review of Finance's Pagano/Zechner Prize

The European Finance Association journal Review of Finance recently announced its 2023/24 Best Paper and Best Referee Awards, and the Runner-up award for the Pagano/Zechner Prize for best non-investments paper went to “The Term Structure of Equity Risk Premia: Levered Noise and New Estimates,” co-authored by UBC Sauder Professors Murray Carlson and Adlai Fisher, with UBC Sauder PhD graduates Oliver Boguth (Arizona State University) and Mikhail Simutin (University of Toronto).

About the research: 

One of the biggest questions in finance is whether stock market returns can be explained by compensation for risk. Researchers have looked at this question in many different ways, but a fairly recent approach is to look at payoffs from near-term risks (like dividend payouts) versus longer-term risks (like capital gains).

The paper uses the S&P 500 options market, which has turnover in excess of fifty trillion U.S. dollars annually, to provide new evidence on the rewards of investing in the stock market. Options are contracts that allow sophisticated investors to bet on or hedge their exposure to upward or downward market movements. In return for a fixed premium, option buyers can gain from positive returns without being exposed to downside (call options) or alternatively gain when the market falls (put options). The interesting thing about the option markets is that by combining options in the right way one can get payoffs that are closely related to the overall stock market, while isolating certain payments.

The paper focuses on isolating the payments in near-term dividends, and finds lower returns than for the stock market as a whole.  Therefore, the rewards to short-term dividend risks have been low in the past thirty years relative to investing in the market as a whole, at least insofar as how the S&P 500 options market is priced.  Beyond this practical importance, the findings provide new evidence relevant to finance theory, which aims to explain the risks that investors demand compensation for.

“This award is especially meaningful to me because it is joint work with Professor Carlson, who has been an exceptional colleague and scholar at UBC for more than twenty years, and two of our former PhD students, Mike and Oliver, who have gone on to their own careers as outstanding researchers and teachers,” said Professor Adlai Fisher. “The UBC finance group has a long-standing history and culture of collaborative research, and we are all fortunate for the many impressive colleagues and students who have been a part of this tradition over the years.”

Professor Murray Carlson added, “We are of course proud to receive this award as it is named for Marco Pagano and Josef Zechner, preeminent scholars in our field and the founding editors of the Review of Finance.  Especially meaningful to me, in the early 1990s when I was beginning my PhD studies in finance at UBC, Josef Zechner was a faculty member here in what was then called the Faculty of Commerce. He taught Corporate Finance Theory, a critical component of a broad finance education, and his work with Rob Heinkel who is still a colleague was particularly important to motivating my thesis and my research approach. This award is just a small part of what has been a special research community in finance at UBC for several generations of scholars.”