Working Papers

  • Do Minimum Wage Hikes Hinder Entrepreneurship? (November 2016)

I address two new questions: Do minimum wage hikes lower the survival rates of startups (firms of age one year)? Do minimum wage hikes lower the conditional survival rates of young firms (ages two to five years)? Relying on a novel panel data set that characterizes the count of continuing and dead private firms, I find that minimum wage hikes lower startup survival rates. Further, the conditional survival rates among firms of age two are less adversely affected, whereas firms of ages three, four, and five are not affected. Debates concerning minimum wage policies can benefit from my entrepreneurship perspectives.

  • A Theory of Dissimilarity Between Stochastic Discount Factors (with Gurdip Bakshi and George Panayotov, August 2016), [to be presented at 2018 AFA, Philadelphia, and 2017 IFSID, Montreal]

This paper proposes a measure of dissimilarity between stochastic discount factors (SDFs). The measure is based on a probability distance metric, synthesizes features of the risk-neutral distribution of currency returns, and, as we show, can be extracted from currency option prices. Linking theory to data, our empirical implementation reveals a salient geographical pattern in dissimilarity across 45 pairs of industrialized economies. We compare the dissimilarity between SDFs derived from several international asset pricing models to the empirical analog, offering a new dimension to gauge models.

  • Measuring and Understanding Uncertainty of Uncertainty (with Jinming Xue, April 2016)

Uncertainty of uncertainty characterizes the dispersion of the cost of insuring equities. We propose a methodology that measures and extracts uncertainty of uncertainty from options on the VIX futures. Uncertainty of uncertainty is high, variable, and not highly correlated with extant uncertainty indexes. Exploring its macroeconomic origins in the setting of a large macroeconomic data set, we find that uncertainty of uncertainty can be forecast by principal components that echo concerns about monetary policy outcomes, flight to safety, and deflation. We draw inferences about the predictive coefficients based on a number of statistical tests, including a parametric bootstrap procedure.

  • Characterizing Disaster Probabilities and Disaster Risk Premiums from Put Option Prices (with Gurdip Bakshi and Jinming Xue, March 2016)

This paper proposes an approach that associates the risk-neutral probability measure with option prices and then computes the expectation of quantities under the real world probability measure, exploiting the form of the stochastic discount factor. This approach differs from foundational approaches that embrace assumptions about taste, technology, and economic primitives to propose formulas for prices and risk premiums. Our method is analytically tractable, absolved of distributional assumptions, and we exploit the approach to elaborate on empirical questions regarding disaster probabilities, conditional return moments, and conditional return asymmetries.

We use a notion of positive dependence between the permanent and transitory components of the stochastic discount factor to develop a lower bound on the expected excess return of a long-term bond. This lower bound is a crucial number, as it represents the minimum expected excess return demanded by investors and can be extracted from options on the 30-year Treasury bond futures. Our implementation reveals that the annualized lower bound ranges from 0.22% to 6.07%, with an unconditional average of 1.18%. The developed results are useful for thinking about cost of debt and measuring investor reaction to monetary policy shocks.