Robert F. Stambaugh

• Lubos Pastor, Robert F. Stambaugh, Lucian A. Taylor, Sustainable Investing. Abstract

  We review the literature on sustainable investing, focusing on financial effects. First, we examine the effects of investor tastes on portfolio tilts and asset prices in a simple equilibrium setting. We establish novel connections, including a direct relation between the green portfolio tilt and the greenium. We also relate our framework to prior modeling of divestment. Finally, we review evidence related to the main concepts from our theoretical analysis, including the greenium, green tilts, climate risk, and investor tastes.

• Lubos Pastor, Robert F. Stambaugh, Lucian A. Taylor, Carbon Burden. Abstract

  We quantify the U.S. corporate sector’s carbon externality by computing the sector’s “carbon burden”—the present value of social costs of its future carbon emissions. Our baseline estimate of the carbon burden is 131% of total corporate equity value. Among individual firms, 77% have carbon burdens exceeding their market capitalizations, as do 13% of firms even with indirect emissions omitted. The 30 largest emitters account for all the decarbonization of U.S. corporations predicted by 2050. Predicted emission reductions, and even firms’ targets, fall short of the Paris Agreement. Firms’ emissions are predictable by past emissions, investment, climate score, and book-to-market.

• 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.

  Related
  Links

  Link to data (including returns on the green factor and GMB portfolio)

  Files

  Internet Appendix for Dissecting Green Returns
• 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.

  Related
  Links
• 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.

  Related
  Files

  Internet Appendix
• 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.

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Past Courses

• FNCE2050 - Investment Management

  This course studies the concepts and evidence relevant to the management of investment portfolios. Topics include diversification, asset allocation, portfolio optimization, factor models, the relation between risk and return, trading, passive (e.g., index-fund) and active (e.g., hedge-fund, long-short) strategies, mutual funds, performance evaluation, long-horizon investing and simulation. The course deals very little with individual security valuation and discretionary investing (i.e., "equity research" or "stock picking"). In addition to course prerequisites, STAT 1020 may be taken concurrently.

• FNCE3990 - Independent Study

  Integrates the work of the various courses and familiarizes the student with the tools and techniques of research.

• Outstanding Paper, Jacobs-Levy Equity Management Center for Quantitative Financial Research, 2023
• Moskowitz Prize, 2022
• Best Paper, Jacobs-Levy Equity Management Center for Quantitative Financial Research, 2022
• Fama-DFA Prize (first-place paper, Journal of Financial Economics), 2021
• AQR Insight Award distinguished paper, 2021
• Best Paper, Jacobs-Levy Equity Management Center for Quantitative Financial Research, 2021
• Outstanding Paper, Jacobs Levy Equity Managment Center for Quantitative Financial Research, 2020
• AQR Insight Award honorable mention, 2019
• Marshall Blume Prize, 2019
• QMA Award for Best Paper on Investment Management, Western Finance Association Meetings, 2018
• Best Paper, Jacobs Levy Equity Management Center for Quantitative Financial Research, 2017
• Fama-DFA Prize (first-place paper, Journal of Financial Economics), 2016
• Marshall Blume Prize Honorable Mention, 2016
• Best Paper, Jacobs Levy Equity Managment Center for Quantitative Financial Research, 2015
• Marshall Blume Prize honorable mention, 2014
• Fellow of the American Finance Association, 2014
• Whitebox Advisors first prize, 2012
• AQR Insight Award honorable mention, 2012
• Marshall Blume Prize honorable mention, 2012
• Fellow of the Financial Management Association, 2010
• Goldman Sachs Asset Management Award (Western Finance Association), 2007
• Moskowitz Prize honorable mention, 2003
• Geewax-Terker Prize honorable mention, 2002
• Fama-DFA Prize (second-place paper, Journal of Financial Economics), 2002
• Fama-DFA Prize (second-place paper, Journal of Financial Economics), 1999
• Marvin Bower Fellow, Harvard University Graduate School of Business, 1997
• Fama-DFA Prize (second-place paper, Journal of Financial Economics), 1997
• Smith-Breeden Prize (first-prize paper, Journal of Finance), 1996
• Batterymarch Fellow, 1985

• Are Younger Managers Better - Or Younger Strategies?, Morningstar - 03/11/2014
• The Argument That Fund Managers Are Improving, Morningstar - 03/07/2014
• New Mutual Funds Better Than Older Ones?, CNN Money - 03/02/2014
• Has Your Fund Become Too Large, Or Is Industry Size the Problem?, Morningstar - 02/28/2014
• Are Young Managers All That?, Morningstar - 02/27/2014
• Why New Mutual Funds are Better, Wall Street Journal - 02/21/2014 Description

   

  
  

• For Older Investors, Old Rules May Not Apply, New York Times - 06/19/2009
• Now the Long Run Looks Riskier, Too, New York Times - 03/28/2009
• Yes, History Has Much to Say About This Market, New York Times - 12/27/2008

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