2016 Jack Treynor Prize Winners

The Institute for Quantitative Research in Finance (The Q Group) is pleased to announce the 2016 winners of its annual Jack Treynor Prizes. The Prize recognizes superior academic working papers with potential applications in the fields of investment management and financial markets.
Read the full press release here.

The three 2016 winners
(in alphabetical order by paper title) are:

Credit-Implied Volatility

Bryan Kelly, University of Chicago
Gerardo Manzo, University of Chicago
Diogo Palhares, AQR

The pricing of corporate credit can be succinctly understood via the credit-implied volatility (CIV) surface. Using a method analogous to the estimation of implied volatility from options contracts, the authors compute credit-implied volatility each month from the firm-by-maturity panel of CDS spreads using the Merton model. The process transforms CDS spreads into units of asset volatility. The CIV surface facilitates direct comparison of credit spreads at different “moneyness” (firm leverage) and time to maturity. The authors use this framework to characterize the behavior of corporate credit markets. They examine moneyness (leverage); they show that of credit spreads dynamics can be parsimoniously described with three clearly interpretable factors; and they examine the cross section of CDS risk premia. Read full paper.

Extrapolation Bias and the Predictability of Stock Returns by Price-Scaled Variables

Stefano Cassella, Krannert School of Management, Purdue University
Huseyin Gulen, Krannert School of Management, Purdue University

Using survey data on expectations of future stock returns, the authors estimate the degree of extrapolation bias (DOX)—the belief that what has happened recently will continue to happen—in investor expectations. Considerable time-series variation exists in the DOX; evidence shows that it can predicted to a meaningful extent. The authors show that the ability of the dividend-price ratio to predict the equity premium is contingent on the DOX. There is Predictability is when the DOX is high and weak otherwise. These results help answer a critical question: when will an overvalued asset, or even a bubble, experience a correction? Read full paper.

Lazy Prices

Lauren Cohen, Harvard Business School
Christopher Malloy, Harvard Business School
Quoc Nguyen, University of Illinois at Chicago

When making required regulatory financial reports, firms very often repeat the same MD&A texts that they most recently used.  Changes in these texts can be quite informative.  Using the complete history of regular quarterly and annual filings by U.S. corporations from 1995-2014, the authors show that changes to the language and construction of financial reports have strong implications for firms’ future returns: a portfolio that shorts “changers” and buys “non-changers” earns up to 188 basis points per month (over 22% per year) in abnormal returns in the future.  Changes in language referring to the executive (CEO and CFO) team, or regarding litigation, are especially informative for future returns. Read full paper.