Andersen Hall, Room 404
2001 Sheridan Rd
Evanston, IL 60208
Chang Joo LeePhd Candidate in Finance (Expected 2013)
Kellogg School of Management
Research Interests: Asset Pricing, Real Business Cycles, Labor Income Risk
Two Trees and Two Fruits , (Job maker paper) January 2013
Abstract: I examine how substitutabilities across industry goods affect relative expected returns of industry portfolios. In an endowment economy in which two industries produce different goods, I show that an expanding industry demands relatively lower expected returns if the substitutability between the two industries' goods is low, and relatively higher expected returns if the substitutability is high. The key mechanism of the model is that when the substitutability between the two goods is low, a positive endowment shock to one industry raises the dividend value of the other industry more by raising the relative price of the good produced by the other industry. Hence, with a low substitutability, the relative consumption beta of an industry decreases with respect to its own shocks. As an industry grows, its endowment shocks become the major source of consumption risk, and therefore, its consumption beta and expected returns decrease relative to those of the other industry. I test these predictions using the nondurable and service consumption industries. The substitutability between nondurables and services is very low in the data. Consistent with the model predictions, the observed relative expected returns of the service industry decrease as the service industry grows. When calibrated under the assumption that services and nondurables have low substitutability, the model successfully explains the long-run movements in the relative expected returns between the nondurable and service industries.
News Shock and Long-Run Consumption Risk , August 2011
Abstract: I study the long-run consumption risk reflected in news shock, a shock to expectations about future productivity. I identify news shock using a structural Vector Autoregression analysis. News shocks cause persistent future consumption growth and explain a large share of consumption movements in the long-run. Consistent with the long-run consumption risk hypothesis, I find that news shocks have a significantly positive risk premium in the cross section of asset returns. I also find that news shocks explain the size premium.
Last Updated: Jan 2013