Forthcoming Articles


Modeling Conditional Factor Risk Premia Implied by Index Option Returns

Published: 3/8/2024  |  DOI: 10.1111/jofi.13324

MATHIEU FOURNIER, KRIS JACOBS, PIOTR ORŁOWSKI

We propose a novel factor model for option returns. Option exposures are estimated nonparametrically, and factor risk premia can vary nonlinearly with states. The model is estimated using regressions with minimal assumptions on factor and option return dynamics. We estimate the model using index options to characterize the conditional risk premia for factors of interest, such as the market return, market variance, tail and intermediary risk factors, higher moments, and the VIX term structure slope. Together, market return and variance explain more than 90% of option return variation. Unconditionally, the magnitude of the variance risk premium is plausible. It displays pronounced time variation, spikes during crises, and always has the expected sign.


Does Alternative Data Improve Financial Forecasting? The Horizon Effect

Published: 3/7/2024  |  DOI: 10.1111/jofi.13323

OLIVIER DESSAINT, THIERRY FOUCAULT, LAURENT FRESARD

Existing research suggests that alternative data are mainly informative about short‐term future outcomes. We show theoretically that the availability of short‐term‐oriented data can induce forecasters to optimally shift their attention from the long term to the short term because it reduces the cost of obtaining short‐term information. Consequently, the informativeness of their long‐term forecasts decreases, even though the informativeness of their short‐term forecasts increases. We test and confirm this prediction by considering how the informativeness of equity analysts' forecasts at various horizons varies over the long run and with their exposure to social media data.


Due Diligence

Published: 3/4/2024  |  DOI: 10.1111/jofi.13322

BRENDAN DALEY, THOMAS GEELEN, BRETT GREEN

We propose a model of due diligence and analyze its effect on prices, payoffs, and deal completion. In our model, if the seller accepts an offer, the winning bidder (or “acquirer”) can gather information and chooses when to complete the transaction. In equilibrium, the acquirer engages in “too much” due diligence. Our quantitative results suggest that the magnitude of the distortion is economically significant. Nevertheless, allowing for due diligence can improve both total surplus and the seller's payoff compared to a setting without due diligence. We use our framework to explore the timing of due diligence, bidder heterogeneity, and breakup fees.


Mergers, Product Prices, and Innovation: Evidence from the Pharmaceutical Industry

Published: 3//2024  |  DOI: 10.1111/jofi.13321

ALICE BONAIMÉ, YE (EMMA) WANG

Using novel data from the pharmaceutical industry, we study product prices and innovation around mergers. Exploiting within‐deal variation in product market consolidation, we show that prices increase more for drugs in consolidating markets than for matched control drugs. Estimates indicate a 2% average price effect that persists for about one year. Price increases expand with acquirer‐target product similarity and are more pronounced within less competitive product markets with fewer players and no generic competition. Examination of trade‐offs reveals these deals generate significant shareholder value. They also spur labeling and other manufacturing‐related innovation, but not the development of new drugs.