Philipp Illeditsch

Contact Information

Office Phone:
215-898-7622

office Address:
2300 Steinberg-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104

Links: Personal Website

Research

Paul Ehling, Michael F. Gallmeyer, Christian Heyerdahl-Larsen, Philipp Illeditsch (Forthcoming), Disagreement about Inflation and the Yield Curve. Abstract

We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly affects the wedge between real and nominal yields, inflation disagreement affects nominal yields predominantly through its impact on the real side of the economy. We show theoretically and empirically that inflation disagreement raises real and nominal yields and their volatilities. Inflation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in fixed income securities. Calibrating our model to disagreement, inflation, and yields reproduces the economically significant impact of inflation disagreement on yield curves.
Philipp Illeditsch (Under Review), Residual Inflation Risk. Abstract

I decompose inflation risk into (i) a component that is correlated with factors that determine investor’s preferences and investment opportunities and real returns on real assets with risky cash flows (stocks, corporate bonds, real estate, commodities, etc.), and (ii) a residual inflation risk component. In equilibrium, only the first component earns a risk premium. Therefore investors should avoid exposure to the residual component. All nominal bonds, including the money-market account, have constant nominal cash flows and thus their real returns are equally exposed to residual inflation risk. In contrast, inflation-protected bonds provide a means to avoid cash flow and residual inflation risk. Hence, every investor should put 100% of her wealth in real assets (inflation-protected bonds, stocks, corporate bonds, real estate, commodities, etc.), and finance every long/short position in nominal bonds with an equal amount of other nominal bonds or by borrowing/lending cash, that is, investors should hold a zero-investment portfolio of nominal bonds and cash.
Peter Feldhuetter, Christian Heyerdahl-Larsen, Philipp Illeditsch (2016), Risk Premia and Volatilities in a Nonlinear Term Structure Model, Review of Finance. Abstract

We introduce a reduced-form term structure model with closed-form solutions for yields where the short rate and market prices of risk are nonlinear functions of Gaussian state variables. The nonlinear model with three factors matches the time-variation in expected excess returns and yield volatilities of U.S. Treasury bonds from 1961 to 2014. Yields and their variances depend on only three factors, yet the model exhibits features consistent with unspanned risk premia (URP) and unspanned stochastic volatility (USV).
Scott Condie, Jayant Ganguli, Philipp Illeditsch (Under Revision), Information Inertia. Abstract
We study how aversion to ambiguity about the predictability of future asset values and cash flows affects optimal portfolios and asset prices. We show that optimal portfolios do not always react to new information even though there are no information processing costs or other market frictions. Moreover, the equilibrium price of the market portfolio does not always incorporate all available public information that is worse than expected. This informational inefficiency leads to price underreaction consistent with momentum.
Philipp Illeditsch (2011), Ambiguous Information, Portfolio Inertia, and Excess Volatility, Journal of Finance. Abstract
I study the effects of risk and ambiguity (Knightian uncertainty) on optimal portfolios
and equilibrium asset prices when investors receive information that is difficult to
link to fundamentals. I show that the desire of investors to hedge ambiguity leads to
portfolio inertia and excess volatility. Specifically, when news is surprising, investors
may not react to price changes even if there are no transaction costs or other market
frictions. Moreover, I show that small shocks to cash flow news, asset betas, or market
risk premia may lead to drastic changes in the stock price and hence to excess
volatility.

Teaching

Past Courses

FNCE1000 - Corporate Finance
This course provides an introduction to the theory, the methods, and the concerns of corporate finance. The concepts developed in FNCE 1000 form the foundation for all elective finance courses. The main topics include: 1) the time value of money and capital budgeting techniques; 2) uncertainty and the trade-off between risk and return; 3) security market efficiency; 4) optimal capital structure, and 5) dividend policy decisions. ACCT 1010 + STAT 1010 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.
FNCE7170 - Financial Derivatives
This course covers one of the most exciting and fundamental areas in finance. Financial derivatives serve as building blocks to understand broad classes of financial problems, such as complex asset portfolios, strategic corporate decisions, and stages in venture capital investing. The main objective of this course is build intuition and skills on (1) pricing and hedging of derivative securities, and (2) using them for investment and risk management. In terms of methodologies, we apply the non-arbitrage principle and the law of one price to dynamic models through three different approaches: the binomial tree model, the Black-Scholes-Merton option pricing model, and the simulation-based risk neutral pricing approach. The course covers a wide range of applications, including the use of derivatives in asset management, the valuation of corporate securities such as stocks and corporate bonds with embedded options, interest rate and credit derivatives, as well as crude oil derivatives. We emphasize practical considerations of implementing strategies using derivatives as tools, especially when no-arbitrage conditions do not hold.