Dimitris Papanikolaou
MIT Sloan School of Management
E52-416
50 Memorial Drive
Cambridge, MA 02142
Office: 617.324.6709
Home: 617.945.5430
d pap@mit.edu
http://web.mit.edu/d_pap/www
Date of Birth: 05/11/78
Citizenship: Greek
Education
MIT, Cambridge, MA, 2002-2007 (Expected)
Ph.D., Financial Economics
Advisors: Prof. Leonid Kogan (Chair), Prof. Andrew W. Lo, Prof. Jun Pan, Prof. Stephen
A. Ross.
London School of Economics, London, UK, 2000-2001,
M.Sc., Finance and Economics
Graduated with Distinction
University of Piraeus, Athens, Greece, 1996-2000
B.A., Economics and Finance
Research Interests
Theoretical and Empirical Asset Pricing; General Equilibrium; Investment; Macroeconomics; Financial Frictions; Contract Theory
Working Papers
Investment-Specific Technological Change and Asset Prices(Job Market Paper)
This paper provides evidence that investment-specific technological change is a source of
systematic risk. In contrast to neutral productivity shocks, the economy needs to invest to
realize the benefits of innovations in investment technology. A positive shock to investment
technology is followed by a reallocation of resources from consumption to investment, leading to a negative price of risk. A portfolio of stocks that produce investment goods minus
stocks that produce consumption goods (IMC) proxies for the shock and is a priced risk
factor. The value of assets in place minus growth opportunities falls after positive shocks
to investment technology, which suggests an explanation for the value puzzle. I formalize
these insights in a dynamic general equilibrium model with two sectors of production. The
model’s implications are supported by the data. The IMC portfolio earns a negative premium, predicts investment and consumption in a manner consistent with the theory, and
helps price the value cross section.
Financial Relationships and the Limits to Arbitrage (with Jiro Kondo)
We propose a new foundation for the limits to arbitrage based on financial relationships
between arbitrageurs and banks. Financially constrained arbitrageurs may choose to seek
additional financing from banks who can understand their strategies. However, a hold-up
problem arises because banks cannot commit to provide capital and have the financial technology to profit from the strategies themselves. Weary of this, arbitrageurs will choose to
stay constrained and limit their correction of mispricing unless banks have sufficient reputational capital. This form of limited arbitrage arises when mispricing is largest and becomes
more substantial as the degree of competition between banks intensifies and arbitrageur
wealth increases.
Work in progress
Informable Finance, Innovation and Syndication: The Benefits and Costs of Non-Verifiable
Communication (with Jiro Kondo)
This paper studies informable finance and its role in loosening an entrepreneur’s financial
constraint. We argue that becoming an informable financier requires expertise. However,
obtaining this expertise also involves acquiring the ability to implement the project alone.
Given imperfect intellectual property rights, this creates a hold-up problem because the
financier might prefer implementing a project on her own once its details are revealed.
Unless there is a cost to expropriation, this threat will severely limit the effectiveness of
innovation in two ways. First, there will be an ex-post inefficiency where the best projects
are underimplemented. Second, there is also an ex-ante inefficiency because entrepreneurs
have insufficient or distorted incentives to innovate. We consider an endogenous cost of
expropriation, namely a financier’s reputation, and show that it does not fully eliminate
this hold-up problem. This framework is then extended to an institutional design problem
with the objective of minimizing these inefficiencies. This extension leads to a new theory
of syndication in entrepreneurial finance based on reducing the financier’s temptation to
expropriate the entrepreneur.
Sources of Systematic Risk (with Igor Makarov)
Using identification through heteroscedasticity, we isolate four robust factors in the U.S.
industry returns. The first factor can be viewed as a proxy for economy-wide shocks. The
second factor is correlated with a portfolio of stocks producing investment goods minus
stocks producing consumption goods (IMC). The third factor differentiates between cyclical vs. non-cyclical stocks. Finally, the fourth factor is consistent with a proxy for shocks
to input good prices. The extracted factors are shown to be important in explaining the
cross-section of expected returns. Unlike the CAPM or the Fama and French three factor
model, they successfully price the cross-section of 48 industry portfolios and do a good
job at explaining the 25 Fama and French size and book-to-market portfolios. The fourth
(”input”) factor is found to be a robust predictor of the value-weighted market portfolio. A
model with multiple heteroscedastic factors provides a simple explanation for the observed
volatile behavior of market betas. We show that industry betas indeed comove and that
variation in model implied betas match its empirical counterpart.
Idiosyncratic Production Risk and Asset Prices
I investigate the effect of uninsurable idiosyncratic production risk on asset prices.
Pay for Temptation: A model of CEO Compensation (with Pierre Yared)
We show how many of the stylized facts about CEO compensation can arise in a model
with one-sided commitment and derive new testable implications.
Awards and Fellowships
Finalist, Lehman Brothers Fellowship for Research Excellence in Finance, 2006
George and Maria Vergotis Fellowship, 2005-2006
MIT Sloan Fellowship, 2003-2007
MIT Presidential Fellowship, 2002-2003
National Bank of Greece Fellowship, 1997-1998
Teaching and Research Experience
Teaching Assistant
Ph.D. Courses:
Advanced Financial Economics I, Prof. Leonid Kogan, Spring 2005, Spring 2006
Advanced Financial Economics III, Prof. Andrew Lo, Spring 2006, Fall 2006
MBA Courses:
Options and Futures, Prof. John Cox, Spring 2005
Financial Management, Prof. Jonathan Lewellen, Summer 2004
Investments, Prof. Jun Pan, Fall 2003, Spring 2004, Spring 2005
Finance Theory I, Prof. Jiang Wang and Utpal Bhattacharya, Fall 2003
Research Assistant
Professor Anna Pavlova (Summer 2005)
Professor Jonathan Lewellen (Summer 2004)
Professor Stephen A. Ross (Summer 2003)
Professional Experience
Barclays Capital, London UK, September-October 2004
Consultant - FX Strategy Group.
Developed and tested trading strategies involving major currencies.
Salomon Smith Barney, London UK, July 2001-July 2002
Analyst - Fixed Income, Emerging Markets Group
Provided macroeconomic coverage of european emerging markets, provided economic forecasts, developed and tested trading strategies.
References
Leonid Kogan (chair)
Associate Professor
MIT Sloan School of Management
50 Memorial Drive, E52-434
Cambridge, MA 02142
Tel: 617-253-2289
Email: lkogan@mit.edu
Andrew W. Lo
Harris & Harris Group Professor; Director
Laboratory for Financial Engineering
MIT Sloan School of Management
50 Memorial Drive, E52-454
Cambridge, MA 02142
Tel: 617-253-0920
Email: alo@mit.edu
Jun Pan
Mitsubishi Career Development
Associate Professor
MIT Sloan School of Managemen
50 Memorial Drive, E52-435
Cambridge, MA 02142
Tel: 617-253-3083
Email: junpan@mit.edu
Stephen A. Ross
Franco Modigliani Professor of Finance
and Economics
MIT Sloan School of Management
50 Memorial Drive, E52-443
Cambridge, MA 02142
Tel: 617-258-8371
Email: sross@mit.edu