Abstract:

A significant fraction of the growth of aggregate market capitalization is due to new firm entry. With incomplete markets, the gains from new firm creation are not shared equally.  Rather, they accrue to a small part of the population, and by potentially displacing existing firms constitute a risk for the marginal investor. We capture these notions in a simple model, and develop a methodology to measure the displacement risk, relying on the discrepancy in the growth rates of aggregate dividends and of the gains from the self-financing trading strategy associated with maintaining a market-weighted portfolio. We find that our measure of displacement risk is closely linked to certain cross-sectional asset-pricing phenomena and can explain a sizable fraction of the equity premium. We argue more generally that dispersion in capital income, a source of risk overlooked in representative agent models, has first-order implications for asset pricing.

About the speaker:

Jianfeng Yu is a Professor of Finance at PBCSF, Tsinghua University. He is also a Piper Jaffray Professor in Finance at the Carlson School of Management, University of Minnesota (currently on leave). He conducts both theoretical and empirical research on behavioral finance and macro finance. His research is published in academic journals such as American Economic Review, Journal of Finance, Journal of Financial Economics, Journal of Monetary Economics, Management Science, and Review of Economic Dynamics. Yu holds a B.Sci. in Probability and Statistics from University of Science and Technology of China, an M.A. in Statistics from Yale University, and a Ph.D. in Finance from the Wharton School of Business, University of Pennsylvania. His research has won various awards including the Smith-Breeden First Prize, Chicago Quantitative Alliance Academic Competition First Prize, Inaugural AQR Insight Award (honorable mention), Crowell Memorial Prize (Third Prize) from PanAgora Asset Management, and the Institute for Quantitative Research in Finance (Q-Group) Research Award.