Kevin Aretz

Kevin Aretz holds an MSc degree in Finance from Maastricht University (mid 2004) and a PhD degree in Finance from Lancaster University (Dec 2008). Prior to joining Manchester Business School as a senior lecturer in September 2011 and becoming a Professor of Finance in August 2017, he worked as a lecturer in Finance at Lancaster University Management School. He also worked, on a part-time basis, as an academic advisor for Old Mutual Asset Management in London.

Research interests

My main research interests are in the areas of cross-sectional asset pricing, corporate finance, and forecasting. I'm currently working on the following topics in these areas:

Theoretical and Empirical Cross-Sectional Asset Pricing:

Real Options Asset Pricing Research:

My asset pricing research studies real options investment models of the firm holding out the potential to explain important cross-sectional stock anomalies, such as the value, momentum, investment, and profitability anomalies in stock returns. In a paper with Peter Pope (London School of Economics, UK), we use a stochastic frontier model to estimate a state variable suggested by the models to drive the anomalies: “capacity overhang,” the difference between a firm’s actual installed capacity and the optimal capacity. We show that the estimate helps explain momentum and profitability, but not value and investment anomalies. The paper is now forthcoming in The Journal of Finance.

The Distress Risk Anomaly:

Another part of my asset pricing research focuses on the “distress risk anomaly,” the empirical finding that US stocks with a high failure probability have lower (not higher!) mean future returns than safe US stocks with a low failure probability. Using hand-collected bankruptcy filing data for firms from 14 non-US countries, my co-authors Chris Florackis (Liverpool University, UK) and Alex Kostakis (also Manchester Business School, UK) show that the distress risk anomaly does not exist outside of the US. Outside of the US, mean future returns significantly increase with the failure probability. This paper is now forthcoming in Management Science.

The Pricing of Higher Moments:

Another part of my asset pricing research focuses on the pricing of higher moments in stock prices. In a paper with Eser Arisoy (Dauphine University, France), we use quantile regressions to come up with a novel estimate of stock-level return skewness. Using realized skewness estimated following the approach of Neuberger (2012), we show that our quantile regression based skewness estimate outperforms other popular estimates in explaining future realized skewness. Despite its outperformance, the quantile regression based estimate is not priced in the cross-section of stock returns, while most other estimates are. The paper is a first-stage R&R at the Journal of Financial and Quantitative Analysis.

Cross-Sectional European Option Pricing:

In more recent asset pricing research, I have shifted my focus from stocks to European options. In a recent paper with Max Lin (DeMontfort University, UK) and Ser-huang Poon (also Manchester Business School, UK), we study the expected returns of such options in a stochastic discount factor framework. Our most interesting result is that the systematic and the idiosyncratic volatility of the underlying asset have a markedly different effect on expected option returns. Empirical tests support the predictions of the model.

Empirical Corporate Finance:

Access to Capital:

My corporate finance research studies the effects of collateral laws on access to credit. In a paper with Murillo Campello (Cornell University and NBER, US) and Mary Marchica (Manchester Business School, UK), we show how a French collateral reform easing the pledging of hard assets to banks led to a dramatic “democratization of credit.” For example, we show that before the reform nine out of ten private French firms used no long-term debt capital, while after the reform that number dropped to about four. We also show that mostly rural firms located in the countryside benefitted from the reform. The reform also had positive real-side effects. For example, it induced firms to invest into both capital and labour and made them more profitable and less risky, in turn leading to decreases in default rates. The reform also improved capital allocation efficiency.

Risk-Shifting:

Another part of my corporate finance research focuses on risk-shifting, the tendency of economic agents with convex payoff functions to take on riskier actions. In a paper with Shantanu Banerjee (Lancaster University, UK) and Oksana Pryshchepa (Birmingham University, UK), we study how distress risk shocks induced through hurricane strikes affect the compositions of the real-asset portfolios owned by firms. We show that such shocks induce firms to skew their asset compositions toward riskier assets, mostly through closing or divesting their lowest risk businesses. This risk shifting behaviour has real economic consequences, with for example risk-shifting firms becoming significantly more likely to fail over the subsequent ten years. This paper is now a first-round R&R at the Review of Finance.