ASU finance professor wins best paper in Journal of Financial Economics

Seth Pruitt’s research provides a model that predicts stock returns, constructs efficient portfolios

Seth Pruitt.

By Shay Moser |
June 04, 2020

Arizona State University Assistant Professor Seth Pruitt recently added another Fama/DFA First Prize for the best paper published in the Journal of Financial Economics — one of the top journals in the field — to his resume. He also won the prize in 2016.

"I appreciate the environment and research support I’ve received at ASU,” Pruitt said. “Doubtless, it has contributed to my progress.”

Journal readers voted electronically February through May for Pruitt’s paper, titled “Characteristics are covariances: A united model of risk and return,” which enhances our understanding of investment strategies, and why different stocks earn different average returns. Pruitt says the model also provides better estimates of the aggregate risks that give rise to these returns. “Investors care about this because they’d like to understand the risks they are exposed to in the stock market,” he said.

“Firms evolve. They get bigger, or they get smaller; they take on more debt or less debt; they undertake more investment or less investment. All of these are observable characteristics of the firm,” Pruitt explained. “These observable characteristics tell us about the firm’s exposure to aggregate risks, how the exposures change over time, and how the exposures vary across firms. We build a statistical model that is based on the asset-pricing theory and estimates these firm-level risk exposures as well as the aggregate risks themselves. This model does extremely well at predicting stock returns and constructing efficient portfolios.”

Pruitt hopes both practitioners and academics can use the research while having a lot of economic and statistical intuition about it.

“I see this award as validating our attempt, as recognizing that we’ve contributed something with impact,” he said. “I would be very pleased if others build on our framework and results, creating exciting new research in the future.”

Pruitt has published papers in the Journal of Financial and Quantitative Analysis; Journal of Money, Credit and Banking; Journal of Financial and Quantitative Analysis; Journal of Econometrics; American Economic Review; American Economic Journal: Macroeconomics; and Journal of Finance, for which he won the 2012 AQR Insight Award First Prize.