Robert F. Stambaugh

Lubos Pastor, Robert F. Stambaugh, Luke Taylor (Working), Green Tilts.

Abstract: We estimate financial institutions’ portfolio tilts that relate to stocks’ environmental, social, and governance (ESG) characteristics. We find ESG-related tilts totaling 6% of the investment industry’s assets under management in 2021. ESG tilts are significant at both the extensive margin (which stocks are held) and the intensive margin (weights on stocks held). The latter tilts are larger. Institutions divest from brown stocks more by reducing positions than by eliminating them. The industry tilts increasingly toward green stocks, due to only the largest institutions. Other institutions and households tilt increasingly toward brown stocks. UNPRI signatories tilt greener; banks tilt browner.

Lubos Pastor, Robert F. Stambaugh, Luke Taylor (2022), Dissecting Green Returns, Journal of Financial Economics, 146 (), pp. 403-424.

Abstract: Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed their higher-yielding non-green twins as the "greenium" widened, and U.S. green stocks outperformed brown as climate concerns strengthened. Despite that outperformance, we estimate lower expected returns for green stocks than for brown, consistent with theory. We estimate expected returns in two ways: ex ante, using implied costs of capital, and ex post, using realized returns purged of shocks from climate concerns and earnings. A theoretically motivated green factor explains much of value stocks' recent underperformance.

Robert F. Stambaugh, Lubos Pastor, Luke Taylor, Min Zhu (2022), Diseconomies of Scale in Active Management: Robust Evidence, Critical Finance Review, 11 (), pp. 593-611.

Abstract: We take a deeper look at the robustness of evidence presented by Pastor, Stambaugh, and Taylor (2015) and Zhu (2018), who find that an actively managed mutual fund's returns relate negatively to both fund size and the size of the active mutual fund industry. When we apply robust regression methods, we confirm both studies' inferences about scale diseconomies at the fund and industry levels. Moreover, data errors play no role, as both studies' results are insensitive to applying various error screens and using alternative return benchmarks. We reject constant returns to scale even after dropping 25% of the most extreme return observations. Finally, we caution that asymmetric removal of influential observations delivers biased conclusions about diseconomies of scale.

Jianan Liu, Tobias J. Moskowitz, Robert F. Stambaugh (Working), Pricing Without Mispricing.

Abstract: We offer a novel test of whether an asset pricing model describes expected returns in the absence of mispricing. Our test assumes such a model assigns zero alpha to investment strategies using decade-old information. The CAPM satisfies this condition, but prominent multifactor models do not. While multifactor betas help capture current expected returns on mispriced stocks, persistence in those betas distorts the stocks' implied expected returns after prices correct. These results are most evident in large-cap stocks, whose multifactor betas are the most persistent. Hence, prominent multifactor models distort expected returns, absent mispricing, for even the largest, most liquid stocks.

Christopher Geczy, Robert F. Stambaugh, David Levin (2021), Investing in Socially Responsible Mutual Funds, The Review of Asset Pricing Studies, 11 (2), pp. 309-351.

Abstract: We construct optimal portfolios of mutual funds whose objectives include socially responsible investment (SRI). Comparing portfolios of these funds to those constructed from the broader fund universe reveals the cost of imposing the SRI constraint on investors seeking the highest Sharpe ratio. This SRI cost crucially depends on the investor’s views about asset pricing models and stock-picking skill by fund managers. To an investor who strongly believes in the CAPM and rules out managerial skill, that is, a market index investor, the cost of the SRI constraint is typically just a few basis points per month, measured in certainty-equivalent loss. To an investor who still disallows skill but instead believes to some degree in pricing models that associate higher returns with exposures to size, value, and momentum factors, the SRI constraint is much costlier, typically by at least 30 basis points per month. The SRI constraint imposes large costs on investors whose beliefs allow a substantial amount of fund-manager skill, that is, investors who heavily rely on individual funds’ track records to predict future performance

Lubos Pastor, Robert F. Stambaugh, Luke Taylor (2021), Sustainable Investing in Equilibrium, Journal of Financial Economics, 142 (), pp. 550-571.

Abstract: We model investing that considers environmental, social, and governance (ESG) criteria. In equilibrium, green assets have low expected returns because investors enjoy holding them and because green assets hedge climate risk. Green assets nevertheless outperform when positive shocks hit the ESG factor, which captures shifts in customers' tastes for green products and investors' tastes for green holdings. The ESG factor and the market portfolio price assets in a two-factor model. The ESG investment industry is largest when investors' ESG preferences differ most. Sustainable investing produces positive social impact by making firms greener and by shifting real investment toward green firms.

Lubos Pastor, Robert F. Stambaugh, Luke Taylor (2020), Fund Tradeoffs, Journal of Financial Economics, 138 (), pp. 614-634.

Abstract: We study tradeoffs among active mutual funds' characteristics. In both our equilibrium model and the data, funds with larger size, lower expense ratio, and higher turnover hold more-liquid portfolios. Portfolio liquidity, a concept introduced here, depends not only on the liquidity of the portfolio's holdings but also on the portfolio's diversification. We also confirm other model-predicted tradeoffs: Larger funds are cheaper. Larger and cheaper funds are less active, based on our new measure of activeness. Better-diversified funds hold less-liquid stocks; they are also larger, cheaper, and trade more. These tradeoffs provide novel evidence of diseconomies of scale in active management.

Robert F. Stambaugh (Working), Skill and Profit in Active Management.

Abstract: I analyze skill’s role in active management under general equilibrium with many assets and costly trading. More-skilled managers produce larger expected total investment profits, and their portfolio weights correlate more highly with assets' future returns. Becoming more skilled, however, can reduce a manager's expected profit if enough other managers also become more skilled. The greater skill allows those managers to identify profit opportunities more accurately, but active management in aggregate then corrects prices more, shrinking the profits those opportunities offer. The latter effect can dominate in a setting consistent with numerous empirical properties of active management and stock returns.

Jianan Liu, Robert F. Stambaugh, Yu Yuan (2019), Size and Value in China, Journal of Financial Economics, 134 (), pp. 48-69.

Abstract: We construct size and value factors in China.  The size factor excludes the smallest 30% of firms, which are companies valued significantly as potential shells in reverse mergers that circumvent tight IPO constraints.  The value factor is based on the earnings-price ratio, which subsumes the book-to-market ratio in capturing all Chinese value effects.  Our three-factor model strongly dominates a model formed by just replicating the Fama and French (1993) procedure in China.  Unlike that model, which leaves a 17% annual alpha on the earnings-price factor, our model explains most reported Chinese anomalies, including profitability and volatility anomalies.

Lubos Pastor and Robert F. Stambaugh (2019), Liquidity Risk after 20 Years, Critical Finance Review, 8 (), pp. 277-299.

Abstract: The Critical Finance Review commissioned Li, Novy-Marx, and Velikov (2017) and Pontiff and Singla (2019) to replicate the results in Pastor and Stambaugh (2003). Both studies successfully replicate our market-wide liquidity measure and find similar estimates of the liquidity risk premium.  In the sample period after our study, the liquidity risk premium estimates are even larger, and the liquidity measure displays sharp drops during the 2008 financial crisis. We respond to both replication studies and offer some related thoughts, such as when to use our traded versus non-traded liquidity factors and how to improve the precision of liquidity beta estimates.