Published and Forthcoming Papers
Active and Passive Investing: Understanding Samuelson’s Dictum, Nicolae Garleanu and Lasse Heje Pedersen, forthcoming The Review of Asset Pricing Studies.
More and more investors become passive - why? Will markets become more inefficient at the macro or micro levels? What is the most inefficient portfolio? Get answers.
Embedded Leverage, Andrea Frazzini and Lasse Heje Pedersen, forthcoming The Review of Asset Pricing Studies. Slides.
Securities that embed leverage alleviate leverage constraints and therefore have lower required returns. Evidence from options and leveraged ETFs.
Featured in Barrons.
Responsible Investing: The ESG-Efficient Frontier, Lasse Heje Pedersen, Shaun Fitzgibbons, and Lukasz Pomorski (2021), Journal of Financial Economics 142 (2), 572-597. ESG factors.
What happens when stocks’ environmental, social, and governance (ESG) scores provide information about firm fundamentals and affect investor preferences?
Featured in Institutional Investor, Alpha Architect, again, IPE.
Enhanced Portfolio Optimization, Lasse Heje Pedersen, Abhilash Babu, and Ari Levine (2021), Financial Analyst Journal, 77(2), 124-151.
Optimization that works - strong empirical results! It is very simple. Yet, it encompasses, and explains intuitively, Black-Litterman, robust optimization, and more.
Nice summary in Alpha Architect.
Deep Value, Clifford S. Asness, John Liew, Lasse Heje Pedersen, and Ashwin Thapar (2021), The Journal of Portfolio Management, 47(4), 11-40. Lead paper.
What really happens when stocks get deeply cheap or expensive? What drives the value effect - risk, (anti)bubbles, or noise? We provide answers and a cool strategy.
Featured on ValueWalk, Alpha Architect, Top download list for All SSRN Journals, SSRN blog.
Betting Against Correlation: Testing Theories of the Low-Risk Effect, Clifford S. Asness, Andrea Frazzini, Niels Joachim Gormsen, and Lasse Heje Pedersen (2020), Journal of Financial Economics, 135 (3), 629-652.
Two cool new factors separate competing theories: BAC is strong, consistent with leverage constraints; SMAX works too, consistent with lottery demand.
Roger F. Murray Prize, 2017. Featured in WSJ, Institutional Investor, Alpha Architect, Morningstar, Barron's (blog), Cliff's Perspective.
Fact and Fiction about Low-Risk Investing, Ron Alquist, Andrea Frazzini, Antti Ilmanen, and Lasse Heje Pedersen (2020), The Journal of Portfolio Management, 46 (6) 72-92. Reprinted in German.
Separates fact from fiction, e.g., saying that the CAPM is dead and so is low-risk investing is fiction; If the CAPM is dead, then low-risk investing is alive.
Trends Everywhere, Abhilash Babu, Ari Levine, Yao Hua Ooi, Lasse Heje Pedersen, and Erik Stamelos (2020), Journal of Investment Management, 18 (1), 52-68.
Out of sample evidence on time series momentum - new assets and factors.
Economics with Market Liquidity Risk, Viral V. Acharya and Lasse Heje Pedersen (2019), Critical Finance Review, 8 (1-2), 111-125.
Market liquidity risk affects asset pricing, investment management, corporate finance, banking, financial crises, macroeconomics, monetary policy, fiscal policy.
Quality Minus Junk, Cliff Asness, Andrea Frazzini, and Lasse Heje Pedersen (2019), Review of Accounting Studies, 24 (1), 34–112. QMJ factors.
We provide a definition of "quality stocks" and study the price and return of quality.
Featured in Business Week, Seeking Alpha.
Generalized Recovery, Christian Skov Jensen, David Lando, and Lasse Heje Pedersen (2019), Journal of Financial Economics, 33 (1), 154-174.
A simple way to understand recovery: count equations and unknowns. No assumptions on the probability distribution, thus generalizing Ross.
Efficiently Inefficient Markets for Assets and Asset Management, Nicolae Garleanu and Lasse Heje Pedersen (2018), The Journal of Finance, 73 (4), 1663-1712.
A new model of how asset management and asset markets actually work! Testable implications for asset pricing, mutual funds, hedge funds, PE, VC.
Journal of Finance's Brattle Distinguished Paper Prize. AIM Investment Center Best Paper Award 2016. Featured in Financial Times, BloombergView, and mentioned again in BloombergView.
Buffett's Alpha, Andrea Frazzini, David Kabiller, and Lasse Heje Pedersen (2018), Financial Analysts Journal, 74 (4): 35-55. Slides.
We explain Buffett's amazing record based on BAB, QMJ, and leverage. Quiz: What is Buffett's SR?
Graham and Dodd Award of Excellence, Top Award. Movie. Featured in MarketWatch, Financial Times, The Economist, Reuters, Reuters Video, Robert Shiller@CSI, CBS News, Pensions and Investments, Forbes, Børsen.
Size Matters, if You Control Your Junk, Clifford S. Asness, Andrea Frazzini, Ronen Israel, Tobias J. Moskowitz, and Lasse Heje Pedersen (2018), Journal of Financial Economics, 129 (3), 479-509.
The size factor is weak because small firms are junky on average. Controlling for junk (or, its inverse, quality), produces a significant size premium.
Featured in FT, Barrons, Forbes, Cliff's Perspective.
Sharpening the Arithmetic of Active Management, Lasse Heje Pedersen (2018), Financial Analysts Journal, 74 (1), 21-36.
Is active management doomed in aggregate and, if so, is the financial system doomed? For the future of asset management, read here.
Featured in The Economist, Bloomberg, WSJ, Cliff's Perspective, Risk, AlphaArchitect.
Risk Everywhere: Modeling and Managing Volatility, Tim Bollerslev, Benjamin Hood, John Huss, and Lasse Heje Pedersen (2018), The Review of Financial Studies, 31 (7), 2729-2773.
HExp: a new, simple, and powerful volatility model that works everywhere. How valuable is this, and any other risk models, in terms of dollars, not just R2?
Carry, Ralph Koijen, Tobias Moskowitz, Lasse H. Pedersen, and Evert Vrugt (2018), Journal of Financial Economics, 127 (2), 197-225. Lead paper. Carry factors.
Carry is an observable component of expected returns, predicting the cross-section and time series of equity, bond, currency, and commodity returns.
Journal of Financial Economics's Fama/DFA Prize, second place winner, 2018. Featured in ETF.com.
A Century of Evidence on Trend-Following Investing, Brian Hurst, Yao Hua Ooi, and Lasse Heje Pedersen (2017), The Journal of Portfolio Management, 44 (1), 15-29. Lead paper.
Novel hand-collected data: time series momentum has worked each decade since 1880, during crises, and across economic environments.
Featured in ValueWalk and AlphaArchitect.
Measuring Systemic Risk, Viral Acharya, Lasse Heje Pedersen, Thomas Philippon, and Matt Richardson (2017), The Review of Financial Studies, 30 (1), 2-47. Editor's Choice (lead paper).
An economic model of how to measure and manage systemic risk with empirical support from the recent crisis.
Associated real time systemic risk rankings here.
Dynamic Portfolio Choice with Frictions, Nicolae Garleanu and Lasse Heje Pedersen (2016), Journal of Economic Theory, 165, 487–516. Appendix.
Optimal high-frequency trading: portfolio choice with transaction costs and the connection between continuous and discrete time.
Early Option Exercise: Never Say Never, Mads Vestergaard Jensen and Lasse Heje Pedersen (2016), Journal of Financial Economics, 121 (2), 278-299. Appendix.
Theory and evidence overturning Merton's rule that one should never exercise a call early or convert a convertible bond.
Which Trend is Your Friend?, Ari Levine and Lasse H. Pedersen (2016), Financial Analysts Journal, 72 (3), 51-66.
We show that time series momentum and moving average crossovers are equivalent representations of a large class of trends, incl. HP filter, Kalman filter.
Betting Against Beta, Andrea Frazzini and Lasse Heje Pedersen (2014), Journal of Financial Economics 111 (1), 1-25. Lead paper. Slides. Excel. BAB factors.
Leverage constraints help explain the relation between risk and return in each of the major asset classes, including why high beta is low alpha.
Fama/DFA First Prize for best paper in the Journal of Financial Economics, 2014.
Swiss Finance Institute Outstanding Paper Award, 2011.
Roger F. Murray Prize, 2011.
Featured in The Economist and Financial Times.
Low-Risk Investing Without Industry Bets, Cliff Asness, Andrea Frazzini, and Lasse Heje Pedersen (2014), Financial Analysts Journal, 70 (4), 24-41.
Betting against beta works within each industry and across industries.
Monitoring Leverage, John Geanakoplos and Lasse Heje Pedersen (2014), ch. 8, 113-127, in Risk Topography: Systemic Risk and Macro Modeling, University of Chicago Press, ed. M. Brunnermeier and A. Krishnamurthy.
Monitoring leverage and margin requirement is a model-free way to monitor systemic risk and the development of liquidity spirals.
Dynamic Trading with Predictable Returns and Transaction Costs, Nicolae Garleanu and Lasse Heje Pedersen (2013), The Journal of Finance 68(6), 2309-2340. Corrigendum. Slides. Picture.
Markowitz portfolio is a moving target. Cool closed-form optimal strategy: aim in front of the target and trade partially towards the aim.
Quant of the year, J-F Bouchaud: "the authors credited for this are Gârleanu and Pedersen, and that’s now a classic paper."
Value and Momentum Everywhere, Cliff Asness, Tobias Moskowitz, and Lasse Heje Pedersen (2013), The Journal of Finance 68(3), 929-985. Slides. VME factors.
Value and momentum exists across global equities, commodities,currencies, and bonds - with intriguing val-mom correlation structure.
Referenced in Nobel Prize Committee’s Scientific Background, 2013.
Featured in the New York Times and Marketwatch.
Demystifying Managed Futures, Brian Hurst, Yao Hua Ooi, and Lasse Heje Pedersen (2013), Journal of Investment Management 11(3), 42-58.
Time series momentum can explain the return of managed futures hedge funds and CTAs.
Time Series Momentum, Tobias Moskowitz, Yao Hua Ooi, and Lasse Heje Pedersen (2012), Journal of Financial Economics 104(2), 228-250. Lead paper.Slides. TSMOM factors.
Striking trends in returns in every major asset class - linked to the trading activity of hedgers and speculators.
Winner of the Whitebox Prize for Best Financial Research 2012.
Featured in the Financial Times and AlphaArchitect.
Leverage Aversion and Risk Parity, Cliff Asness, Andrea Frazzini, and Lasse Heje Pedersen (2012), Financial Analysts Journal 68(1), 47-59.
A Risk Parity portfolio that over-weights safer asset classes outperforms the market. This across-asset-class evidence complements the within-asset-class evidence on Betting Against Beta.
Margin-Based Asset Pricing and Deviations from the Law of One Price, Nicolae Garleanu and Lasse Heje Pedersen (2011), The Review of Financial Studies 24(6), 1980-2022. Slides. Data.
High margin requirements = high required returns. Explains the Fed’s lending programs, the CDS-bond basis, the failure of the covered interest-rate parity, and more.
Michael Brennan Award Winner for the Best Paper in the Review of Financial Studies.
Two Monetary Tools: Interest Rates and Haircuts, Adam Ashcraft, Nicolae Garleanu, and Lasse H. Pedersen (2010), NBER Macroeconomics Annual 25, 143-180. Slides.
A macro model with financial frictions: how central bank lending facilities can ease credit frictions – with strong empirical evidence from the recent crisis.
How Sovereign is Sovereign Credit Risk?, Francis A. Longstaff, Jun Pan, Lasse H. Pedersen, and Kenneth J. Singleton (2010), American Economic Journal: Macroeconomics 3(2), 75–103.
Sovereign CDS can be explained by, and predicted by, U.S. equity, volatility, and bond market risk premia.
Featured in the Economic Times.
When Everyone Runs for the Exit, Lasse H. Pedersen (2009), The International Journal of Central Banking 5, 177- 199.
Understanding the global liquidity crisis and the quant event. Evidence on the driving mechanisms. (A solicited commentary.)
Featured in The Economist, New York Times and Forbes.
Market Liquidity and Funding Liquidity, Markus Brunnermeier and Lasse H. Pedersen (2009), The Review of Financial Studies 22, 2201- 2238.
Market liquidity and the funding conditions are mutually reinforcing, giving rise to liquidity spirals, fragility, flight to quality, and systemic risk.
Referenced in Nobel Prize Committee’s Scientific Background, 2013.
The most cited paper in SEC rulemaking according to Geoffroy and Lee (2020, p.59)
Featured in The Economist and Barron’s.
Demand-Based Option Pricing, Nicolae Garleanu, Lasse H. Pedersen, and Allen Poteshman (2009), The Review of Financial Studies 22 (10), 4259-4299.
How end user demand affects option pricing when dealers cannot perfectly hedge. New theory and unique data.
Geewax, Terker & Company First Prize, 2006.
Carry Trades and Currency Crashes, Markus Brunnermeier, Stefan Nagel, and Lasse Heje Pedersen (2008), NBER Macroeconomics Annual 23, 313-348.
How the carry trade is subject to crash risk during funding liquidity crises. Results help resolve the forward premium puzzle.
Featured in Forbes.
Slow Moving Capital, Mark Mitchell, Lasse Heje Pedersen, and Todd Pulvino (2007), The American Economic Review 97, 215-220.
Empirical evidence: when arbitrageurs lose capital and new capital arrives slowly, prices become depressed and later rebound.
Liquidity and Risk Management, Nicolae Garleanu, and Lasse Heje Pedersen (2007), The American Economic Review 97, 193- 197. Appendix.
Tighter risk management can lead to illiquidity and lower prices. A multiplier effects arises when illiquidity tightens risk management.
Valuation in Over-the-Counter Markets, Darrell Duffie, Nicolae Garleanu, and Lasse H. Pedersen (2007), The Review of Financial Studies 20, 1865-1900.
The effect of search and bargaining on asset prices and the dynamics of aggregate liquidity shocks.
Liquidity and Asset Prices, Yakov Amihud, Haim Mendelson, and Lasse Heje Pedersen (2005), Foundations and Trends in Finance 1, 269- 364.
A survey of the literature.
Asset Pricing with Liquidity Risk, Viral Acharya and Lasse Heje Pedersen (2005), Journal of Financial Economics 77, 375-410.
How unpredictable changes in liquidity affect security returns; a liquidity-adjusted CAPM and empirical evidence.
Referenced in Nobel Prize Committee’s Scientific Background, 2013.
Fama/DFA First Prize for best paper in the Journal of Financial Economics, 2005.
NYSE Award for best paper on equity trading, Western Finance Association, 2003.
Glucksman First-Place Award for best research paper in finance, NYU Stern, 2002- 2003.
Predatory Trading, Markus K. Brunnermeier and Lasse Heje Pedersen (2005), The Journal of Finance 60, 1825-1863.
When a large trader liquidates, predators also sell, leading to price over-shooting and systemic risk.
Nominated for the Smith- Breeden Prize for best paper in The Journal of Finance, 2005.
Barclays Global Investors Award for the best conference paper at the European Finance Association, 2003.
Over-the-Counter Markets, Darrell Duffie, Nicolae Garleanu, and Lasse Heje Pedersen (2005), Econometrica 73, 1815- 1847.
I general search model for financial markets. Marketmakers' bid-ask spread is narrower for sophisticated investors with better search options (NB: reverse of information-based models).
Awarded the seventh Stephen A. Ross Prize. Referenced in Nobel Prize Committee’s Scientific Background, 2010.
Adverse Selection and the Required Return, Nicolae Garleanu and Lasse Heje Pedersen (2004), The Review of Financial Studies 17, 643- 665.
Bid-ask spreads due to asymmetric information affect required returns differently than exogenous trading costs - paper shows explicitly how.
Modeling Sovereign Yield Spreads: A Case Study of Russian Debt, Darrell Duffie, Lasse H. Pedersen, and Ken Singleton (2003), The Journal of Finance 58, 119-159.
A model of credit risk accounting for both default and restructuring. The study of Russian debt develops a new estimation methodology.
Nominated for the Smith- Breeden Prize for best paper in The Journal of Finance, 2003.
Securities Lending, Shorting, and Pricing, Darrell Duffie, Nicolae Garleanu, and Lasse Heje Pedersen (2002), Journal of Financial Economics 66, 307-339.
Short sellers search for stock owners and pay a lending fee. The lending fee increases the stock's price.
NYSE Award for best paper on equity trading, Western Finance Association, 2002.