Steven D. Baker Steven D. Baker

Assistant Professor (Finance)
McIntire School of Commerce

University of Virginia.
P.O. Box 400173
Charlottesville, Va  22904-4173

Office: 382 Rouss and Robertson Halls, East Lawn

Carnegie Mellon University - Ph.D. Financial Economics - 2013
University of Virginia - M. Computer Science - 2008
Brown University - Sc.B. Computer Science, A.B. German Studies - 2003

Research Focus:
Multi-agent macro-finance models, with applications to asset pricing, portfolio theory, and commodities markets.


Preventing Controversial Catastrophes
(With Burton Hollifield and Emilio Osambela)
Review of Asset Pricing Studies, forthcoming

Disagreement, Speculation, and Aggregate Investment,
Journal of Financial Economics, 2016
(With Burton Hollifield and Emilio Osambela)
(Working paper version. Code. Errata.)

[A related earlier paper,
Disagreement, Financial Markets, and the Real Economy, is incorporated into my Ph.D. dissertation. It characterizes a production model with disagreement in a discrete time setting without capital adjustment costs, but considers a case with multiple firms.]

Working Papers:

Asset Prices and Portfolios with Externalities
(With Burton Hollifield and Emilio Osambela)

Elementary portfolio theory implies that environmentalists optimally hold more shares of polluting firms than non-environmentalists, and that polluting firms are more highly valued and attract more investment than otherwise identical firms that do not pollute. These results reflect the demand to hedge against states with high pollution, which occur when dirty technology is more heavily and profitably utilized. Pigouvian taxation can reverse the valuation and investment results, but environmentalists will still overweight polluters in their portfolios. We introduce countervailing motives for environmentalists to underweight polluters, comparing the implications when environmentalists coordinate to internalize pollution, or have nonpecuniary disutility from holding polluter stock. In the latter case, we show that introducing a green derivative product may dramatically alter who invests most in polluters, but has no impact on aggregate pollution.

The Financialization of Storable Commodities

I solve a dynamic equilibrium model of commodity spot and futures prices, incorporating an active futures market, heterogeneous risk-averse participants, and storage. When calibrated to data from the crude oil market, the model implies that financialization reduces the futures risk premium, and increases correlation between futures open interest and the spot price level. However there is no long-run increase in the mean spot price, and speculative storage generally attenuates financialization's effect on spot price volatility. Therefore financialization's effect on spot price dynamics through storage arbitrage is likely modest, even if futures positions and risk premia are substantially altered.

The Price of Oil Risk
(With Bryan Routledge)

We solve a Pareto risk-sharing problem with heterogeneous agents with recursive utility over multiple goods.  We use this optimal consumption allocation to derive a pricing kernel and the price of oil and related futures contracts.  This gives us insight into the dynamics of risk premia in commodity markets for oil.  As an example, in a calibrated version of our model we show how rising oil prices and falling oil risk premium are an outcome of the dynamic properties of the optimal risk sharing solution.  We also compute portfolios that implement the optimal consumption policies and demonstrate that large and variable open interest is a property of optimal risk sharing.

The Survival and Extinction of Overconfident Agents
(A short student paper written during summer, 2009)

I study the survival of an irrationally overconfident agent, who competes with a rational agent in a stochastic growth economy subject to a short-sale constraint. I find that the constraint increases the overconfident agent's chance of survival, often providing an infinite relative improvement asymptotically. The magnitude of the effect increases with the level of overconfidence, and becomes stronger as the source of economic risk shifts from the growth process to direct innovations in the dividend process. As the overconfident agent loses his endowment, the constraint binds more often, altering the interest rate and his price of risk. A survival index is constructed, which links overconfidence with survival effects due to impatience and risk aversion.