Tjeerd de Vries and Alexis Toda. Capital and Labor Income Pareto Exponents across Time and Space. Review of Income and Wealth (2022)
We estimate capital and labor income Pareto exponents across 475 country-year observations that span 52 countries over half a century (1967–2018). We document two stylized facts: (i) capital income is more unequally distributed than labor income in the tail; namely, the capital exponent (1–3, median 1.46) is smaller than labor (2–5, median 3.35), and (ii) capital and labor exponents are nearly uncorrelated. To explain these findings, we build an incomplete market model with job ladders and capital income risk that gives rise to a capital income Pareto exponent smaller than but nearly unrelated to the labor exponent. Our results suggest the importance of distinguishing income and wealth inequality.
Tjeerd de Vries. A Tale of Two Tails: A Model-free Approach to Estimating Disaster Risk Premia and Testing Asset Pricing Models (2023)
- Winner of Walter Heller Memorial Prize (Best 3rd Year Paper)
- Winner of Richard A. Libby Award
I propose a model-free methodology to assess the impact of disaster risk on the market return. Using stock returns and the risk-neutral quantile function observed from option prices, I employ quantile regressions to estimate local dispersions between the physical and risk-neutral distributions. The results indicate substantial disparities in the left tails of both distributions, while the right tails remain nearly identical. These local differences suggest that disaster risk drives the equity premium, leading to high volatility in the stochastic discount factor. Additionally, I introduce a risk-adjustment term that captures a significant portion of the disparity between physical and risk-neutral distributions in the left-tail. I interpret the risk-adjustment term as a real time measure of the Peso problem and find that it fluctuates significantly over time. During the peak of the 2008 financial crisis and the 2020 Covid-19 crisis, the risk-adjustment term predicts a 5% probability of a market return of -28% or lower. Both findings provide model-free evidence of time-varying disaster risk.
Tjeerd de Vries, Yanki Kalfa , Allan Timmermann and Russel Wermers. Pension Plan Scale, Bargaining Power, and Investment Allocation and Performance (2023)
- Winner of ICPM Research Award
We explore the relation between the size of a defined benefit pension plan and its choice of active vs. passive management, internal vs. external management, and public vs. private markets. We find positive scale economies in pension plan investments; large plans have stronger bargaining power over their external managers in negotiating fees as well as having access to higher (pre-fee)-performing funds, relative to small plans. Using matching estimators, we find that internal management is associated with significantly lower costs than external management, reinforcing the enhanced bargaining power of large pension plans that have fixed-cost advantages in setting up internal management.
Tjeerd de Vries and Alexis Toda. Robust Asset-Liability Management (2023)
How should financial institutions hedge their balance sheets against interest rate risk when they have long-term assets and liabilities? Using the perspective of functional and numerical analysis, we propose a model-free bond portfolio selection method that generalizes classical immunization and accommodates arbitrary liability structure, portfolio constraints, and perturbations in interest rates. We prove the generic existence of an immunizing portfolio that maximizes the worst-case equity with a tight error estimate and provide a solution algorithm. Numerical evaluations using empirical and simulated yield curves from a no-arbitrage term structure model support the feasibility and accuracy of our approach relative to existing methods.
Tjeerd de Vries. Market Consistent Valuation of Deferred Taxes (2020)
PDF | Slides
This paper develops a continuous time framework to value deferred taxes using option pricing techniques. The valuation renders a market consistent pricing procedure, meaning that the final price of tax deferrals depends on parameters observed in the market. The framework is flexible enough to value deferred taxes like loss carryforward, loss carryback or liabilities arising from temporary differences. In addition, our approach unravels the influence of leverage on deferred tax values and proposes an alternative to the Modigliani-Miller theorem. A simulation study over multiple time horizons shows that carryforward value is negatively influenced by leverage, whereas carryback and latent tax liability values increase. An empirical application serves to illustrate the practical use of our model: the loss absorbing capacity of deferred taxes (LAC DT) for European insurers.
Recent and Upcoming PresentationsInternational Econometrics PhD Conference - Erasmus University, the Netherlands: 11/20/23 -- 11/21/23
ESI Brownbag Seminar - Chapman University, Orange County: 08/23/23
Spring JOIM Conference - Rady School of Management, San Diego: 03/26/23 -- 03/28/23 [link]
SoFiE Conference - University of Cambridge, Cambridge: 06/26/22 -- 06/29/22 [link]
AFA Annual Meetings: 01/07/21 [link]
MVEA Annual Meetings - Kansas University, Kansas City: 10/15/21 [link]
EGSC - University of Washington, St. Louis : 10/26/20 [link]