Working Papers

In Search of the True Greenium, Marc Eskildsen, Markus Ibert, Theis Ingerslev Jensen, and Lasse Heje Pedersen.

Literature: huge greenium estimates all over the place. Our replication: everything insignificant. Our new method: modest and robust greenium. Data and code.


Corporate Bond Factors: Replication Failures and a New Framework, Jens Dick-Nielsen, Peter Feldhütter, Lasse Heje Pedersen, and Christian Stolborg.

New cool clean data. The factors you think work, don't - those you don't know, do. Get the data here.

Winner of the Utah Winter Finance Conference Best Paper Award 2024.


How Global is Predictability? The Power of Financial Transfer Learning, Oliver Hellum, Lasse Heje Pedersen, and Anders Rønn-Nielsen.

One model above them all.


Carbon Pricing versus Green Finance, Lasse Heje Pedersen.

How do you translate a carbon tax of 43$/tCO2 into percentage points change in cost of capital from green finance? Get the answer, plus other new insights. 

Swiss Finance Institute's Outstanding Paper Award "to an unpublished research paper expected to make an outstanding contribution to the field of finance."


Machine Learning and the Implementable Efficient Frontier, Theis Ingerslev Jensen, Bryan Kelly, Semyon Malamud, and Lasse Heje Pedersen.

The implementable efficient frontier: powerful tool (with surprising shape). ML+portfolio theory= better frontier.

Get the code here.

Books

Efficiently Inefficient: How Smart Money Invests & Market Prices Are Determined, Lasse Heje Pedersen, Princeton University Press, 2015.

Trading strategies, a new view of financial markets, and interviews with 8 great investors. Selected reviews (see much more on the book website):

Top financial reads of 2015

A Must-Read For Serious Investors

These are books Wall Street's smartest people think you should read this summer (#2) 

CNBC


Market Liquidity: Asset Pricing, Risk, and Crises, Yakov Amihud, Haim Mendelson, and Lasse Heje Pedersen, Cambridge University Press, 2013.

Review in Quantitative Finance and beyond, Korajczyk: "pivotal in furthering our understanding of the effects of illiquidity on asset pricing."

Published and Forthcoming Papers

Modigliani-Miller with green investors. Should green bonds lower WACC? No, but it does.


Equity-factor replication crisis? Nope. Free global data and code, plus our Bayesian framework, which adds economic intuition and statistical power.

Journal of Finance Dimensional Fund Advisors Prize distinguished paper, 2023. 

Get updated global factor returns via easy drop-down menu, link to stock-level data on WRDS, replication code, and documentation.


New factors and asset pricing tests. Symmetry ~= factor exposure; antisymmetry ~= alpha. PAP is the new BAB.


A study of GameStop + a model showing how social network spillovers can explain influencers, thought leaders, momentum, reversal, bubbles, volatility, and volume. 

VISUAL. Featured in Risk. 


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.


Securities that embed leverage alleviate leverage constraints and therefore have lower required returns. Evidence from options and leveraged ETFs.

Featured in Barrons.


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. 


Optimization that works - strong empirical results! It is very simple. Yet, it encompasses, and explains intuitively, Black-Litterman, robust optimization, and more.

Graham and Dodd Top Award. Nice summary in Alpha Architect.


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.

Bernstein Fabozzi/Jacobs Levy Award. Featured on ValueWalk,  Alpha Architect, Top download list for All SSRN Journals, SSRN blog.


Two cool new factors separate competing theories: BAC is strong, consistent with leverage constraints; SMAX works too, consistent with lottery demand.

Journal of Financial Economics's Fama/DFA Prize, second place winner, 2020. Roger F. Murray Prize, 2017. Featured in WSJ, Institutional Investor, Alpha Architect, Morningstar, Barron's (blog), Cliff's Perspective.


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. 


Out of sample evidence on time series momentum -  new assets and factors.


Market liquidity risk affects asset pricing, investment management, corporate finance, banking, financial crises, macroeconomics, monetary policy, fiscal policy.


We provide a definition of "quality stocks" and study the price and return of quality.

Featured in Business Week, Seeking Alpha. 


A simple way to understand recovery: count equations and unknowns. No assumptions on the probability distribution, thus generalizing Ross. 


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.


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.


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.


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.


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 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. 


Novel hand-collected data: time series momentum has worked each decade since 1880, during crises, and across economic environments.

Featured in ValueWalk and AlphaArchitect.


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.


Optimal high-frequency trading: portfolio choice with transaction costs and the connection between continuous and discrete time.


Theory and evidence overturning Merton's rule that one should never exercise a call early or convert a convertible bond.


We show that time series momentum and moving average crossovers are equivalent representations of a large class of trends, incl. HP filter, Kalman filter.


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.


Betting against beta works within each industry and across industries.


Monitoring leverage and margin requirement is a model-free way to monitor systemic risk and the development of liquidity spirals.


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 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.


Time series momentum can explain the return of managed futures hedge funds and CTAs.


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.


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.


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.


A macro model with financial frictions: how central bank lending facilities can ease credit frictions – with strong empirical evidence from the recent crisis.


Sovereign CDS can be explained by, and predicted by, U.S. equity, volatility, and bond market risk premia.

Featured in the Economic Times.


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 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 in 2013 and again in 2022.

The most cited paper in SEC rulemaking according to Geoffroy and Lee (2020, p.59)

Featured in The Economist and Barron’s.


How end user demand affects option pricing when dealers cannot perfectly hedge. New theory and unique data.

Geewax, Terker & Company First Prize, 2006.


How the carry trade is subject to crash risk during funding liquidity crises. Results help resolve the forward premium puzzle.

Featured in Forbes.


Empirical evidence: when arbitrageurs lose capital and new capital arrives slowly, prices become depressed and later rebound.


Tighter risk management can lead to illiquidity and lower prices. A multiplier effects arises when illiquidity tightens risk management.


The effect of search and bargaining on asset prices and the dynamics of aggregate liquidity shocks.


A survey of the literature.


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.


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.


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.


Bid-ask spreads due to asymmetric information affect required returns differently than exogenous trading costs - paper shows explicitly how.


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.


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.

Old Working Papers

Auctions with Endogenous Selling, Nicolae Garleanu and Lasse Heje Pedersen (2000).

The effect of market structure on volume, prices, and welfare with applications to real-world auctions.


Density-Based Inference in Affine Jump-Diffusions, Jun Liu, Jun Pan, and Lasse Heje Pedersen (2000).

A closed-form approximation to the density of affine jump diffusions with applications to finance.


Corporate Bond Specialness, Amrut Nashikkar and Lasse Heje Pedersen (2007).

Shorting costs for corporate bonds.

Policy Papers, Op-Eds, and Blogs 

Aktiv kontra passiv forvaltning (in Danish), Ken L. Bechmann and Lasse H. Pedersen, Finans/Invest 3, 2017.


A Tax on Systemic Risk, Viral Acharya, Lasse H. Pedersen, Thomas Philippon, and Matt Richardson (2010), in NBER publication on Quantifying Systemic Risk, ed. by Joseph Haubrich and Andrew Lo.


Taxing Systemic Risk, Viral Acharya, Lasse H. Pedersen, Thomas Philippon, and Matt Richardson (2010), in Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, ed. by Acharya, Cooley, Richardson, and Walter, Wiley, 2010, chap. 5. 

Reprinted in Handbook on Systemic Risk, ed. By Fouque and Langsam, Cambridge University Press, 2013.


Regulating Systemic Risk, Viral Acharya, Lasse Heje Pedersen, Thomas Philippon, and Matt Richardson (2009), in Restoring Financial Stability: How to Repair a Failed System, ed. by Viral Acharya and Matt Richardson, Wiley, chap. 13, 283-304. Summary.


Hedge Funds in the Aftermath of the Financial Crisis, Stephen Brown, Marcin Kacperczyk, Alexander Ljungqvist, Anthony Lynch, Lasse Heje Pedersen, and Matthew Richardson (2009), in Restoring Financial Stability: How to Repair a Failed System, ed. by Viral Acharya and Matt Richardson, Wiley, chap. 6, 157-178.Summary.


Saving free markets from market failure: institutions and liquidity are crucial, Lasse Heje Pedersen, Forbes, 9/29/2009.

Chinese version, sina.com.cn: 佩德森：避免 自由市场失灵


A proposal to prevent wholesale financial failure, Lasse H. Pedersen and Nouriel Roubini, Financial Times, 1/30/2009.


Liquidity risk and the current crisis, Lasse H. Pedersen, Stern on Finance and VoxEU.

Miscellaneous

How to Succeed in Academia or Have Fun Trying for ph.d. students and junior faculty - updated 2021.

Talk on academic impact (prepared for workshop for CBS management)

Overview of frictional finance. pdf, ppt