In Press
Bakshi G, Cerrato M, Crosby J. Implications of Incomplete Markets for International Economies. Review of Financial Studies. In Press.PDF icon incomplete_markets_08-31-2017.pdf
Bakshi G, Chabi-Yo F, Gao X. A Recovery That We Can Trust? Deducing and Testing the Restrictions of the Recovery Theorem. Review of Financial Studies. In Press.Abstract

How reliable is the recovery theorem of Ross (2015)? We explore this question in the context of options on the 30-year Treasury bond futures, allowing us to deduce restrictions that link the physical and risk-neutral return distributions. Our empirical results undermine the implications
of the recovery theorem. First, we reject an implicit assumption of the recovery theorem that the martingale component of the stochastic discount factor is identical to unity. Second, we consider the restrictions between the physical and risk-neutral return moments when the recovery
theorem holds, and reject them in both forecasting regressions and generalized method of moment estimations

PDF icon recovery_07-23-2017.pdf
Bakshi G, Gao X, Rossi A. Understanding the Sources of Risk Underlying the Cross-Section of Commodity Returns. Management Science. In Press.Abstract

We show that a model featuring an average commodity factor, a carry factor, and a momentum factor is capable of describing the cross-sectional variation of commodity returns. More parsimonious one- and
two-factor models that feature only the average and/or carry factors are rejected. To provide an economic interpretation, we show that innovations in global equity volatility can price portfolios formed on carry,
while innovations in a commodity-based measure of speculative activity can price portfolios formed on momentum. Finally, we characterize the relation between the factors and the investment opportunity set.

PDF icon bakshi_gao_rossi_2017_management_science.pdf
Bakshi G, Madan D, Panayotov G. Heterogeneity in Beliefs and Volatility tails. Journal of Financial and Quantitative Analysis [Internet]. 2015. Publisher's VersionAbstract

We propose a model of volatility tail behavior, in which the pricing measure dominates the physical measure in both tails of the volatility distribution and, hence, the derived pricing kernel exhibits an increasing and decreasing region in the volatility dimension. The model features investors who have heterogeneity in beliefs about volatility outcomes, and maximize their utility by choosing volatility-contingent cash flows. Our empirical examination appears to suggest that the model is better suited to mimic the data counterparts in the left tail of the volatility distribution, both qualitatively and quantitatively.

PDF icon jfqa_style_06_03_2014_accepted.pdf
Bakshi G, Panayotov G. Currency Carry Trade Return Predictability and Asset Pricing Implications. Journal of Financial Economics. 2013;110 :139-163.PDF icon bakshi_panayotov_carry_published.pdf
Bakshi G, Chabi-Yo F. Variance Bounds on the Permanent and Transitory Components of Stochastic Discount factors. Journal of Financial Economics [Internet]. 2012;105 :191-208. Publisher's VersionAbstract

In this paper, we develop lower bounds on the variance of the permanent component and the transitory component, and on the variance of the ratio of the permanent to the transitory components of SDFs. Exactly solved eigenfunction problems are then used to study the empirical attributes of asset pricing models that incorporate long-run risk, external habit persistence, and rare disasters. Specific quantitative implications are developed for the variance of the permanent and the transitory components, the return behavior of the long-term bond, and the comovement between the transitory and the permanent components of SDFs.

PDF icon bakshi_chabi-yo_permanent_and_transitory_components_jfe_2012.pdf
Bakshi G, Panayotov G, Skoulakis G. Improving the Predictability of Real Economic Activity and Asset Returns with Forward variances Inferred fron Option Portfolios. Journal of Financial Economics. 2011;100 (3) :191-208.Abstract

The goal of this paper is to show that the growth rate of the Baltic Dry Index (BDI) has predictive ability for a range of stock markets, which is demonstrated through in-sample tests and out-of-sample statistics.The documented stock return predictability is also of economic significance, as seen by examining the certainty equivalent returns and Sharpe ratios of portfolio strategies that exploit the BDI growth rate. In addition, the BDI growth rate predicts the returns of commodity indexes, and we find some evidence for joint predictability of stock and commodity returns in a system of predictive regressions. Finally, the BDI growth rate predicts the growth in global economic activity, establishing further BDI’s role in revealing a link between the real and financial sectors.

PDF icon bakshi_panayotov_skoulakis_jfe2011_improving_the_predictability.pdf
Bakshi G, Panayotov G. First passage Probability, Jump Models, and Intra-period Risk. Journal of Financial Economics. 2010;95 :20-40.PDF icon bakshi_panayotov_jfe2010_intraperiod_risk.pdf
Bakshi G, Skoulakis G. Do Subjective Expectations Explain Asset Pricing Puzzles?. Journal of Financial Economics. 2010;98 :462-477.PDF icon bakshi_skoulakis_jfe_accepted.pdf
Bakshi G, Madan D, Panayotov G. Returns of Claims on the Upside and the Viability of U-shaped Pricing Kernels. Journal of Financial Economics. 2010;97 :130-154.PDF icon bakshi_madan_panoyotov_2010_vol97.pdf
Bakshi G, Madan D, Panayotov G. Deducing the Implications of Jump Models for the Structure of Crashes, Rallies, Jump Arrival rates and Extremes. Journal of Business and Economic Statistics. 2010;28 (3) :380-396.PDF icon bakshi_madan_panaotov_2010jbes_crashes_and_extremes.pdf
Bakshi G, Wu L. The Behavior of Risk and Market Prices over the Nasdaq Bubble period. Management Science. 2010;56 (12) :2237-2250.PDF icon bakshi_wu_2010decemeber_nasdaq_bubble.pdf