Finance

- RECENT PUBLICATION: Article
  Article | Journal of Political Economy | August 2020
  Macroeconomic Drivers of Bond and Equity Risks
  John Y. Campbell, Carolin E. Pflueger and Luis M. Viceira
  Our new model of consumption-based habit generates time-varying risk premia on bonds and stocks from loglinear, homoskedastic macroeconomic dynamics. Consumers' first-order condition for the real risk-free bond generates an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. We estimate that the correlation between inflation and the output gap switched from negative to positive in 2001. Higher inflation lowers real bond returns, and higher output raises stock returns, explaining why the bond-stock return correlation changed from positive to negative. In the model, risk premia amplify this change in bond-stock return comovement and are crucial for a quantitative explanation.
  Keywords: consumption-based habit formation; consumption Euler equation; time-varying risk premia; inflation dynamics; bond-stock correlation; Risk and Uncertainty; Bonds; Macroeconomics;
  
  Citation:
  Campbell, John Y., Carolin E. Pflueger, and Luis M. Viceira. "Macroeconomic Drivers of Bond and Equity Risks." Journal of Political Economy 128, no. 8 (August 2020): 3148–3185. View Details
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- RECENT PUBLICATION: Article
  Article | Journal of Financial and Quantitative Analysis | August 2020
  Leverage and the Beta Anomaly
  Malcolm Baker, Mathias F. Hoeyer and Jeffrey Wurgler
  The well-known weak empirical relationship between beta risk and the cost of equity—the beta anomaly—generates a simple tradeoff theory: As firms lever up, the overall cost of capital falls as leverage increases equity beta, but as debt becomes riskier the marginal benefit of increasing equity beta declines. As a simple theoretical framework predicts, we find that leverage is inversely related to asset beta, including upside asset beta, which is hard to explain by the traditional leverage tradeoff with financial distress that emphasizes downside risk. The results are robust to a variety of specification choices and control variables.
  Keywords: risk anomaly; leverage; Capital Structure; Risk and Uncertainty;
  
  Citation:
  Baker, Malcolm, Mathias F. Hoeyer, and Jeffrey Wurgler. "Leverage and the Beta Anomaly." Journal of Financial and Quantitative Analysis 55, no. 5 (August 2020): 1491–1514. View Details
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- RECENT PUBLICATION: Case
  Case | HBS Case Collection | July 2020
  CSL Capital Management: Patriot Proppants (A)
  Victoria Ivashina and Yury Kapko
  This two-part case series follows CSL Capital’s 2009 investment in the greenfield manufacturing company, Patriot Proppants. CSL, a recently established investment firm, employs a unique investment model, funding new ("green field") energy service businesses that serve Oil & Gas customers in the growing U.S. shale industry. This (A) case offers a perspective on CSL’s approach to deploying capital and the intricacies of the decision process as it relates to potential investment in Patriot. This case also offers insights into fundraising issues, asset-backed lending and co-investments. Specifically, in addition to evaluating the investment opportunity, CSL must decide which co-investment partner to take on, should it advance with the investment. Students are presented with an opportunity to closely evaluate the terms of the co-investment proposals, particularly given that they came separately from strategic and financial co-investors with divergent objectives.
  
  Citation:
  Ivashina, Victoria, and Yury Kapko. "CSL Capital Management: Patriot Proppants (A)." Harvard Business School Case 220-094, July 2020. View Details
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Our strategy is to assemble and nurture a faculty whose interests and skills complement each other, and who work well together:

a) to produce a broad range of finance-related research that is published in top-tier scientific and practitioner journals, and that addresses issues of present and future importance to managers (including regulators and policy makers);

b) to develop highly-relevant and intellectually rigorous MBA and executive education courses; and

c) to mentor future academics through the Business Economics doctoral program.

Our applied focus and access to business organizations are major advantages which are reinforced by our students and our case-based approach. We have a faculty with broad expertise, and we have resources, field contacts, and institutional support, all of which we can leverage to do richer work and be more productive than we could at other institutions.

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Harvard Business School,
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